Cash advance: what is it and should you get one?

Difficult financial situations happen from time to time for most people. When this happens, it’s not always obvious where to turn for help. In these situations, however, a cash advance can be an attractive option because it is faster and easier to obtain than other options.

Depending on the severity of the circumstances, you may not have the time and energy to consider options that take longer and involve more paperwork.

But despite their benefits, cash advances can also come with significant costs. Therefore, it is important to understand what cash advances are and how much they could cost you. It is also important to know the alternatives available to you in case of need.

What is a cash advance?

A cash advance is a short-term loan offered by a bank or other financial institution, often with very high interest and fees. But the trade-off is that they allow borrowers to easily access the funds they need, faster than other types of loans.

When people think of cash advances, they often think of credit card cash advances. It’s one of the most common types of cash advances, but it’s not the only one.

However, the cost of using a cash advance can be high and can lead to an endless cycle of interest accrual. Therefore, it is important to understand how they work and all the parts that are involved.

Types of cash advances

“Cash advance” always refers to a form of borrowing, but there is not just one type of cash advance. There are a few common types, but how each works is different.

Credit card cash advances

Credit card cash advances are the most common type of cash advance and involve borrowing up to a cash advance limit on your account. Note that with this method there is a cash advance limit, and this limit is usually less than your purchase limit. The cash advance limit is usually only a fraction of your credit limit.

Additionally, the APR for credit card cash advances is often several percentage points higher than the APR for purchases and balance transfers. To complicate matters further, there is no grace period for credit card cash advances.

There is a grace period that requires card issuers not to charge interest for at least 21 days after the payment due date. However, cash advances don’t have that luxury and will start earning interest immediately after you receive your money.

Payday loans

Payday loans provide small cash advances to individuals that must be repaid on the borrower’s next payday. These loans generally require proof of income such as a pay stub to show that the borrower is able to repay the loan. However, payday loans can also use other sources of income to cover the balance.

Payday loans are short-term loans, usually for small amounts; it’s not uncommon for a payday loan to be for $100. Nevertheless, their high interest rates can make payday loans a very expensive way to borrow.

For example, the borrower might have to pay a fee of $20 to borrow $100. $20 sounds like a small fee, but as a percentage, it’s 20% of the principle, which is high. But payday loans usually have a repayment period of 14 days. So, if this 20% interest charge is annualized, it equates to over 500% APR.

To make matters worse, some states allow payday loans to be renewed. In this case, any amount that the borrower cannot repay by his next payday can be turned into a new loan. Additionally, there may be interest charges, late fees, and other charges payable. And it’s all on top of our previously mentioned 500% APR.

Cash Advances to Merchants

Merchant cash advances are a way for businesses to get the funds they need. Merchant cash advances use past sales or future sales projections to determine the amount of the advance. This is similar to the pay stub requirement for payday loans. Merchant cash advances are a relatively easy way for small businesses to access the cash they need, as the whole process often only takes a few days.

How does a cash advance work?

When you take out a cash advance, you are borrowing an amount that will be subject to interest and fees associated with the advance. There may be additional charges, such as cash advance fees. Additionally, cash advances such as credit card cash advances often come with a higher APR than other types of transactions.

Depending on the type of cash advance, you may have a few different options for taking out a cash advance.

Try these methods:

• In line. Your card issuer may allow you to request a cash advance through their website or mobile app, so you don’t have to travel to request an advance.
• In person. If you have a bank-issued credit card, you can take the card there and ask for a cash advance.
• At an ATM. You may be able to request a cash advance at your bank’s ATM. However, as with most ATM transactions, you will need a PIN to be able to request a cash advance in this way. If you don’t have a PIN, you can request one; however, your bank may not be able to provide you with one immediately. Therefore, you may have to wait a few days for your PIN.
• By convenience check. Your bank may offer convenience checks that you can issue or the amount you need as an advance.

Costs and fees

There are a few costs and fees to consider if you’re considering a cash advance. Depending on the terms of the advance, these fees can be significant. Therefore, you should be aware of all the implications before applying for one.

For credit card cash advances, for example, cash advances may have a higher APR than balance transfers and purchases. Then, in addition to the higher APR, you will have to pay a separate cash advance fee.

Cash advance fees are typically 3% to 5% of the cash advance amount. So a $500 cash advance would incur a fee of $15 to $25, on average.

There are also other fees you might encounter. For example, if you request a cash advance at an ATM, fees may apply. It could also be the money if you request a cash advance in a foreign currency, which could incur additional charges.