Are you in need of quick cash but don't have enough in your bank account? One option to consider is a cash advance. But what exactly is a cash advance, and what are the features and fees associated with it?
This article will provide a comprehensive guide to understanding cash advances and help you determine if it's the right choice for your financial situation.
What Is a Cash Advance
A cash advance is a short-term loan for the cardholder to withdraw a certain amount of cash offered by banks, credit card issuers, or alternative lenders. Despite steep interest rates and fees, borrowers are attracted to cash advances because of their quick approval and funding.
Taking out a cash advance may seem like a good idea, just as simple and innocuous as withdrawing cash with a debit card, but it’s quite the opposite. Cash advances typically have several features that distinguish them from other types of loans.
Features of a Cash Advance
High fees: Cash advances usually come with a fee that is a percentage of the amount you borrow, in addition to any other fees charged by the lender.
High-interest rates: The interest rates on cash advances are often much higher than the rates on other types of loans.
No grace period: Unlike other loans, cash advances usually don't have a grace period, so you start accruing interest charges immediately.
Separate credit limit: Cash advances might have a separate line of credit, a portion of your overall credit limit.
When to Take a Cash Advance
Taking out a cash advance should be a last resort due to the high fees and interest rates associated with this type of loan. However, there may be situations where a cash advance is your only option.
Examples of the “last resort” scenarios:
- You have an unexpected expense that exceeds your savings.
- You face a financial emergency requiring immediate payment and thus have no time for traditional loan approval.
- Cash is the only form of payment you can choose.
If you decide to take out a cash advance, ensure you understand all the costs involved, including the cash advance fee and the ATM or bank fees. Develop a plan to repay the advance quickly to avoid accruing additional interest charges.
Types of Cash Advances
Several cash advances are available, but they all have one thing in common: high fees and interest rates. Here are the three most common types of cash advances:
Credit Card Cash Advances
Credit card cash advances are the most popular type of cash advance. You can withdraw money from your credit card by using an ATM or getting a check from your
However, credit card cash advances incur hefty charges that may outweigh any benefits, including fees and interest. Fees are typically a flat rate or a percentage of the total amount of each cash advance you request, and the interest rate is usually higher than regular purchases. Moreover, the interest begins to accrue immediately, with no grace period.
Merchant Cash Advances
Merchant cash advances are loans that businesses receive from banks or alternative lenders.
Companies with imperfect credit that face financial issues might seek this approach to raise funds. These advances are typically paid back with a portion of future credit card receipts or sales funds from online accounts. Alternative lenders consider various data points to rate a company’s credit from different perspectives rather than credit score alone.
However, many borrowers roll over their loans and accrue additional interest charges.
Payday loans are a type of short-term loan issued by special payday lenders that can start anywhere from $100 to $1,000 and are often characterized by high fees and high-interest rates of over 100%. Let's dive deeper into payday loans and their features:
Amount based on a paycheck and state regulations:
Payday loans are typically based on the borrower’s income and state regulations instead of conducting a credit check or considering your ability to repay the loan.
Payday loans are short-term loans that must be repaid on the borrower's next payday, with additional interest charged if extended. Payday loans can be rolled over with additional interest, and up to 80% of the borrowers end up as repeat customers within 30 days.
To get a payday loan, the borrower must write a postdated check to the lender for the full amount, including the borrowings you request and fees. Then the lender immediately issues the borrowed amount but waits to cash the check on the next payday. Some lenders now have automatic repayment agreements with borrowers.
Quick, complex process:
Payday loans always feature quick approval and fast funding. However, preparing payday application materials like personal identification and proof of income from your company or bank can sometimes be a complex process that takes longer.
Cash Advance Terms and Fees
When considering a cash advance, knowing the terms and fees associated with this type of borrowing is essential. Here's what you need to know:
Cash Advance APR
Credit card cash advances typically have a higher interest rate than purchases or balance transfers. For instance, while the purchase and balance transfer APR for a credit card might be 18.49% - 28.49%, the cash advance APR can be as high as 29.74%.
Cash Advance Fee
Cash advances often come with a fee that’s a percentage of the borrowed amount. This fee is deducted from your credit limit, just like the amount you requested. For instance, if you have a credit limit of $1,000 and request a $100 cash advance with a 5% fee, your credit limit will be reduced to $950 ($900 for the cash advance and $50 for the fee).
ATM or Bank Fee
Depending on the issuer and the type of transaction, you may also be charged an ATM or bank fee for withdrawing the cash advance. The fee can vary, typically between $2 and $5.
No Grace Period
Unlike purchases made with your credit card, cash advances don't come with a grace period. This means that interest starts accruing right away from the date you withdraw the cash advance.
When you purchase with a credit card, there is no penalty if you make the full payment before the due day, while cash advances don’t have such a grace period.
You need to weigh this part of the cost carefully since you’re asked to pay extra from day one, even if your balance is paid in full by the due date.
Separate Credit Limit
Credit card cash advances often have a separate line of credit, a portion of your overall credit limit, based on your credit and the issuer. You may only be able to take out a few hundred dollars.
To avoid getting trapped in a cycle of debt, it's important to carefully consider the terms and fees associated with a cash advance before requesting one. Furthermore, it's recommended that you pay off the cash advance as soon as possible to minimize the interest charges.
How to Get Cash Advances?
If you've decided that a cash advance is a right option for you, here are the four ways you can get a cash advance:
At an ATM
One way to get a cash advance is to use an ATM. To do this, you'll need your credit card's PIN. If you don’t have a PIN, you can request one from your credit card issuer, which can usually be done online.
Over the Phone
Some credit card companies offer online services and can transfer the cash advance from your line of credit to an account you nominate, such as your checking account, which means you can complete this task simply with your phone. You need to confirm this with your card issuer, as not all support this.
At Your Bank
You can also get a cash advance by visiting your bank. Unlike an ATM, you won't need your credit card's PIN. However, you will need proper identification.
If your credit card issuer offers convenience checks, you can fill one out, naming yourself the payee. Then you can either cash it or deposit it at your bank.
Remember to read the terms and conditions carefully when getting a cash advance, including the fees, interest rates, and repayment terms. It's also essential to plan to repay the advance quickly to avoid accruing additional interest charges.
When Should You Pay off a Cash Advance?
Paying off the balance immediately is crucial if you've taken out a cash advance.
Because cash advances cost you a lot of money in high-interest rates and fees, this money will pile up over a short period, at the risk of falling into revolving debt.
Paying off the balance immediately can help you minimize the interest charges and reduce your debt. You should make at least the minimum payment due on the cash advance balance to avoid late fees and penalties.
If you choose only to make the minimum payment, you might have more cash in hand now, but don’t forget; it leads to a more extended repayment schedule and more additional interest charges over time. To save money and get out of debt faster, consider making more than the minimum payment or paying off the entire balance in full.
Alternatives to Cash Advance
Cash advances can be an expensive way to borrow money due to their high-interest rates and fees. If you're considering a cash advance, it's worth exploring alternative options that may be more affordable. Here are some alternatives to consider:
A balance transfer moves a balance from a credit card with a higher APR to another with a 0% APR promotional rate, saving you money on the interest you'll pay or even be used to obtain cash.
You can request the balance transfer amount by check, and that amount plus a balance transfer fee would be added to the limit on your balance transfer credit card.
During the 0% APR promotion, you can pay it back over time on an interest-free basis. Also, don’t forget to consider the processing time when planning, which could cost up to 7 days or more.
Borrow from family or friends
If you have a friend or family member willing and able to lend you money, this can be a good alternative to a cash advance. Just be sure to agree on repayment terms and stick to them to avoid strained relationships.
Get a personal loan
A personal loan can be a good option if you need more money. Personal loans generally have lower interest rates than credit cards and can be repaid over a longer period of time.
Use savings from your debit card
If you have a checking or savings account, you can use your debit card to access the funds you need without incurring any interest charges or fees.
Apply for a bank loan.
If you have a good credit score, you may qualify for a bank loan with a lower interest rate than a cash advance. Be sure to compare rates and terms from different lenders to find the best deal.
Use your emergency fund.
If you have an emergency fund set aside for unexpected expenses, this can be a good option to cover your cash needs without incurring any debt.
Leverage promotional offers
Some credit card issuers offer promotional offers, such as 0% APR on purchases or balance transfers for a limited time. Be sure to read the terms and conditions carefully and understand any fees associated with the offer.
Do Cash Advances Impact Your Credit Score?
Overall, taking out a cash advance may not directly impact your credit score.
However, it can affect your credit utilization ratio, a factor used in calculating your score. The credit utilization ratio is generally expressed as a percentage, calculated as the credit you currently use divided by the total credit available.
For instance, if you have a $5,000 limit and a balance of $2,500, your credit utilization ratio is 50%. But if you take a cash advance of $1,000, your outstanding balance will be $3,500, resulting in a credit utilization ratio of 70%. A high utilization ratio can indicate high credit risk, representing heavy reliance on credit and negatively impacting your credit score.
Furthermore, failing to pay with high-interest charges before the due date is another warning signal for poor credit.Furthermore, if the cash advance causes you to exceed your credit limit, your score could also be impacted. Lenders may also see that you were over the limit at one point, which could make it harder for you to get new credit.
You now have a comprehensive understanding of a cash advance, including its types, fees, and potential impact on your credit score.
You can combine the information about cash advances with your personal particulars to conduct a careful consideration, then finally make an informed choice out of multiple finance solutions.
A cash advance can be a quick solution when you need cash in a pinch. However, it comes at a cost, including high fees and interest rates.
Keep in mind that you need to consider the pros and cons carefully before taking out a cash advance. When you choose the cash advance as a final solution, always remember to plan your repayment schedule and pay off your balance as soon as possible to avoid high charges and reduce the risk of involving debt. Thanks for reading!
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