Dangerous, low-value loans that should be avoided.
The words “cash advance” appear in a lot of different places. You might see them painted on the window of a store that advertises “Fast Cash,” “No Credit Checks,” or “Payday Loans.” You might see them buried in your credit card statement. You might even see them in your H.R. manual at work.
“Cash advance” can refer to a number of different things, and as the name suggests, they’re all ways of getting a quick influx of cash. But how you get that money—and the rates you’ll pay to get it—aren’t the same.
In fact, the term “cash advance” can refer to three totally different things. They have the same name, but that’s where the similarities end.
Some “cash advances” are better than others, and not all are safe. Here are the three kinds of “cash advance” you might encounter, and what you need to know about them so you can make the right decision when you borrow.
1. “Cash Advance” Loans
What is a Cash Advance Loan?
This type of “cash advance” is offered by online and storefront lenders. The word “loan” may or may not appear in the title, but that’s exactly what it is. And it’s not just any type of loan. A “cash advance” loan is simply a payday loan in disguise.
How does a Cash Advance Loan work?
A cash advance loan works just like a payday loan. (Not surprising, since they’re the exact same thing.) To get one, you go to a payday lender and write a check. You date it for your next payday and make it out for the amount of the loan plus interest and fees. The lender will then give you cash or transfer money to your bank account. It’s yours to spend, but remember that check you wrote? As soon as your next payday arrives, the lender will cash it and the amount will be withdrawn from your bank account.
Are Cash Advance Loans safe?
The thing about cash advance loans (and payday loans too) is that, in theory, they might not sound too bad. A typical cash advance lender will charge $15 for every 100 borrowed, and if you pay it back when it’s due, that’s all you’ll be charged.1 (As well as any extra fees, of course.)
But there’s a catch.
You only get a couple weeks before the loan becomes due, and then you have to pay back everything—the cash you borrowed, plus the interest and fees the lender charged. You have to pay it all back in a single lump sum, and for many people, this is simply unlikely to happen.
So theoretically, cash advance loans might not be too bad, but in practice they’re very risky, and the statistics bear this out:
- The average cash advance borrower spends an average of $520 in fees to repeatedly borrow a $375 advance.
- The average cash advance requires a lump-sum payment that consumes 36 percent of an average borrower’s paycheck.2
What happens if you can’t pay back a Cash Advance Loan?
As the data shows, cash advance loans are costly, and a lot of people have trouble paying them back. And what happens then? Many lenders will give you the option of something called a “rollover.” It might sound more appealing than defaulting, but be careful, because it’s usually a trap.
When you roll over a loan, you extend the term and only pay the interest that you owe. The lender gives you another couple weeks to pay back the amount you borrowed, but when it becomes due, you’re responsible for paying the interest all over again.
What does this mean?
While a cash advance lender may only charge $15 for every $100 you borrow, that’s only for two weeks. If you don’t pay back the loan as well as interest and fees, you roll over the loan and then you’re responsible for paying the interest again. An interest rate of 15 percent for a two-week loan becomes an interest rate of 30 percent when you roll it over for a month. And if you extend the loan for a year and do the math, you end up with an annual percentage rate of almost 400 percent!
Many people have trouble paying back their cash advance loans, and rollover is common. In fact, 80 percent of cash advances are rolled over or followed by another loan within 14 days of the first.3 And far too often it doesn’t end there. The loan becomes due and borrowers still can’t pay back the lump sum they owe, so what do they do? They roll it over once more and the cycle starts again.
Of course, cash advance lenders have no problem with this. They’re usually more than willing to let you roll over a cash advance loan because that’s how they make their money—the more you roll it over, the more you pay in interest. And the alternative isn’t any better: If you stop making payments altogether and default, the lender can pursue legal action against you and potentially garnish your wages.4
Are Cash Advance Loans a bad idea?
For many people, yes. They’re a type of no-credit-check loan and are attractive to borrowers with low credit scores. But there are safer, more affordable loan options if you have bad credit, such as an installment loan, which spreads the cost of the loan out over time.
2. Credit Card Cash Advance
What is a Credit Card Cash Advance?
A credit card cash advance is a type of loan offered by credit card companies. You use your credit card to borrow money, which you’re then responsible for paying back along with interest and fees.
How does a Credit Card Cash Advance work?
To get a credit card cash advance you go to an ATM or bank location and use your credit card to withdraw money. The amount you withdraw is added to your credit card bill almost as if you were using your card to make a purchase. But unlike using a debit card, the money that you get through a credit card cash advance doesn’t come from your bank account. It’s loaned to you by your credit card company, and you’re responsible for paying it back.
The longer you take to repay a credit card cash advance, the more you’ll pay in interest. You’re given no grace period, and interest begins to accumulate immediately. Also, compared to using a credit card to make a purchase, the interest rate you’re charged is much higher—generally around 20 percent APR or above.
How much are Credit Card Cash Advance fees?
Credit card cash advance fees typically range from two to five percent of the amount you withdraw. This means you’re likely to pay between two to five dollars for every 100 dollars you borrow.
You’re also responsible for paying interest, and in a survey of 100 cards, 86 percent of them charged above 20 percent in interest, and one charged a full 36 percent.5
Why do people get Credit Card Cash Advances?
Credit card cash advances can come in handy when there’s a necessary expense that you can’t charge to your card (like rent) and you don’t have the funds to cover it otherwise. But the problem with credit card cash advances is that they have fees and interest rates that are generally much higher than if you just used your credit card to make a purchase. Also, you can only borrow as much as your cash advance limit allows, and if you already have a balance on your credit card, that amount may be reduced.
Is a Credit Card Cash Advance a good idea?
In general, credit card cash advances are a much more affordable option than a cash advance loan from a payday lender. But they still carry fees and high-interest rates, so they should only be used if you’ve exhausted more affordable options.
3. Employer Cash Advance
What is an Employer Cash Advance?
Unlike cash advance loans and credit card cash advances, an employer cash advance is not a loan. The money you receive is yours—it comes straight out of your next paycheck. Not all employers offer cash advances, and those that do may have strict policies that limit the number of times you can request an advance and reserve approval for true emergencies.
How does an Employer Cash Advance work?
To get a cash advance, first determine if your employer offers one. It’s best to do this without asking directly. Your employer is under no obligation to give you an advance, and many do so simply as a favor, so check with coworkers or maybe your H.R. manager. If you ask your supervisor directly, you could potentially create an awkward situation.
Once you determine that cash advances are allowed, you’ll need to request one. Some companies have a formal process in place, while others may allow you to speak privately with your supervisor. Experts suggest that employees approach this conversation tactfully. Time it so you don’t ask when things are hectic at work and prepare a good argument for why you need the advance and why it’s urgent.6
If your company agrees to an advance, you’ll likely have to sign some paperwork. This will formalize the arrangement and should include details about when the money will be deducted from your paycheck so there are no misunderstandings.
Is an Employer Cash Advance a good idea?
An employer cash advance can be good because you get the money interest-free. However, your company may not offer them, and if they do, they may be unwilling to provide one except in the event of an emergency. Also, the money that you’re advanced will come out of your next paycheck, so it may cause future difficulties if you don’t budget properly.
There are three major types of “cash advance”: cash advance loans, credit card cash advances, and employer cash advances. They have the same name, but their costs are very different.
While one of these cash advances might make sense in certain scenarios, if you repeatedly find yourself in need of one, it may suggest that your financial situation deserves attention. Consider creating a budget and reducing unnecessary expenses so you can consistently meet all of your financial obligations.
- “What is a Payday Loan?” Consumer Financial Protection Bureau, 16 March 2016, https://www.consumerfinance.gov/askcfpb/1567/what-payday-loan.html. Accessed on 25 May 2017.
- “Payday Loan Facts and the CFPB’s Impact.”The Pew Charitable Trusts, 14 Jan. 2016,http://www.pewtrusts.org/en/research-and-analysis/fact-sheets/2016/01/payday-loan-facts-and-the-cfpbs-impact. Accessed on 25 May 2017.
- Burke, Kathleen, et al. “CFPB Data Point: Payday Lending.”Consumer Financial Protection Bureau, March 2014, https://s3.amazonaws.com/files.consumerfinance.gov/f/201403_cfpb_report_payday-lending.pdf. Accessed 25 May 2017.
- “Can a Payday Lender Garnish My Wages?” Consumer Financial Protection Bureau, 27 May 2016, https://www.consumerfinance.gov/askcfpb/1609/can-payday-lender-garnish-my-wages.html. Accessed 30 May 2017.
- Kossman, Sienna. “2015 Cash Advance Survey: Convenient Cash Will Cost You Plenty.” Credit Cards.com, 2 June 2015, http://www.creditcards.com/credit-card-news/cash-advance-survey.php. Accessed on 25 May 2017.
- Dratch, Dana. “How Employee Salary Advances Work.” Credit Cards.com, 17 July 2013, http://www.creditcards.com/credit-card-news/employee-salary-pay-advance-1273.php. Accessed on 25 May 2017.
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