3 Aug, 2022

Let’s go through the basics of cash advances, what kind of cost is associated with them and how they work. A cash advance is kind of a short term that is issued by your credit card company. These types of loans allow consumers to use the available credit to borrow cash. Interest and fees will be charged on the loan. 

A cash advance will help you withdraw cash from your remaining credit card limit. The credit card company determines the cash advance limit that will be a portion of your credit card limit. Any credit card user with an available cash credit line on their card will be able to obtain a cash advance until they reach their limit. 

Credit card users can pay off their debts using cash advances, this can even include credit card debt on another card. 

How Does A Cash Advance Loan Work? 

The credit card companies don’t check your credit score if you want a cash advance because the money that you will borrow will come from your own credit card account. Credit card users can withdraw the amount they need, this amount will be charged to their credit card limit. 

Installment loans and cash advances work in a similar manner. They offer a lump sum amount of money to the borrower but they are not the same. Installment loans don’t have a particular monthly payment or set end date. The repayment terms on cash advances are more flexible because borrower’s can repay it at their own preference. 

The Cost Of Cash Advances (Fees and Terms)

There are two types of expenses associated with cash advance loans – interest and the other is upfront fees. The Annual Interest Rates or APRs on your cash advance are higher than the purchases on your credit card. Interest will start to accumulate on your loan as soon as you take it and continue until it is paid back. 

There are no interest-free grace periods for your cash advances unlike the regular credit card transactions. Interest will start accruing on your cash advance transactions immediately, on the other hand, the terms of your credit card will dictate when interest will be added to your purchases. 

Different credit card companies charge different APRs. According to an analysis conducted in 2020 from CreditCards.com, the average APR is 24.8% on cash advance loans. The specific costs associated with your cash advance loans will be mentioned in the cardholder agreement. Apart from interest, borrowers have to pay transaction fees on their cash advances. The average cash advance fee in the year 2018 was 5.3% on the loan amount. This was published in a report by the Consumer Financial Protection Bureau’s 2019 Consumer Credit Card Market Report. Those individuals with lower credit scores will pay more cash advance fees. 

The fees can range anywhere from $5 to $10.

How Safe Are Cash Advance Loans?

There is no collateral involved in cash advance loans. Your assets won’t be repossessed by the lender if you default on your repayments unlike auto title loans. 

Cash advance loans are more expensive than the other loan options available to you. As soon as you take the money out, interest will start to accumulate. If you’re planning to take a cash advance loan be prepared to pay it back immediately, this will prevent a high amount of interest from accumulating. The sooner you pay back a cash advance loan, the lesser amount of interest will collect and you’ll have to make less payments. 

Are Cash Advance Loans Bad?

People who are struggling with liquidity problems avail cash advance loans. However, cash advance loans demand high-interest rates and fees. Borrowers can get cash immediately but they have to pay the cost. 

Your credit score can be negatively impacted due to cash advance loans. This will depend on how much money you’re borrowing. You increase your credit utilisation with cash advance loans by adding to your remaining credit card balance. 

The Fair Isaac Corporation determines the FICO score. If you want to improve or maintain your credit score, you shouldn’t utilize more than 30% of your credit card limit. 

For example, if your credit card limit is $2000 on a monthly basis, you must have a $600 balance. 

Are Payday Loans and Cash Advance Loans The Same?

Payday lenders often refer to their loans as ‘cash advance loans’. However, there is a lot of difference between cash advance loans issued by payday lenders and credit card advance loans. 

Payday loans can range anywhere from $50 to  $1000 and the rate of interest is usually in triple-digits. A payday loan has a very short loan term because they must be paid back within the next payday. 

How Are Cash Advances Different Than Credit Card Transactions?

Credit card transactions and cash advances are not the same, even though you use a credit card for a cash advance. 

Cash advances are more expensive than the regular transactions made using your credit card. The rate of interest is higher than normal transactions. 

When a purchase is made using a credit card, you will have a grace period where you won’t be charged any interest. On the other hand, cash advances don’t offer a 30 day period where you won’t be charged any interest. As soon as you take a cash advance loan, you’ll be charged with an interest. 

Advances will not lead to any rewards or points, a benefit that credit cards offer if you make a purchase.

Additionally, using your debit card to withdraw money isn’t the same as using your credit card for withdrawing money. When you use a debit card to withdraw money, it’s cash that you already have while a cash advance isn’t the money available in your bank account. It’s a loan with a heavy rate of interest. 

Where Can You Avail A Cash Advance?

You can get a cash advance through several different options. 

Ask Your Financial Institution

You can get the necessary funds from your credit union or bank.

ATM Withdrawals

If you’re using an ATM for cash advance, you have to speak to the credit card company beforehand and set up a PIN. Insert your credit card inside the ATM machine and withdraw the amount you need that is within the limit. You can be charged ATM fees too. 

Convenience Checks

Write a convenience check the same way you would fill out a normal check. You can then deposit or cash it at your financial institution. 

What Are The Alternatives To A Cash Advance?

You can receive immediate short-term financial help with cash advance loans when you’ve limited options. Make sure you research different options before lending. This will help you understand your financial situation better. Loans have their own set of pros and cons. 

These are the six alternatives –

  • Personal Installment Loans 

There are personal loans that will offer you the necessary amount of money within a business day. The APR on a cash advance loan is higher than that of a personal loan. This will be based on your credit score. Personal loans are available from banks, credit unions, online lenders, and different financial institutions. 

  • Borrowing From Your Loved Ones 

When you’re struggling with money and need it immediately, a family member or friend can help you out. In order to maintain this relationship, you must pay back the person from whom you actually borrowed money. 

  • Credit Cards –

You can always charge an emergency expenditure on your credit card rather than receiving a cash advance. Check the available credit limit to see whether you can use your credit card for the emergency in hand. You will end up saving money in the form of fees and high interest rates that accompany cash advance loans.

  • Credit Union Payday Alternative Loans

You’ve to be a part of the federal credit union to receive a payday alternative loan from a credit union. You can pay these loans in monthly installments. The rate of interest on credit union payday loans is 28%.

  • Car Title Loans

Car title loans will use your motorcycle, truck, or car as collateral usually for a short period of time, i.e. 30 days. A fee has to be paid to initiate the loan. In case you default on your payment, the loan will roll over or the lender will repossess your vehicle. Additional fees and interest is charged if you roll over a loan. 

  • Payday Loans

Payday loans or short-term loans need to be paid off within the next pay period. The rate of interest on payday loans can be as high as 400%. These loans are extremely expensive and will cost you more if you roll over the loan.