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What Is a Cash Advance?
A cash advance is a short-term loan arrangement that provides quick access to cash but involves high fees and interest rates. You can obtain a cash advance from banks, credit cards, and through specific apps. While cash advances can provide immediate financial relief, they have potential financial drawbacks in addition to their fees, such as higher credit utilization, increased debt (with its costs), and a negative impact on credit scores.
Key Takeaways
- Cash advances are short-term loans with high interest rates and fees, available through banks, credit cards, and apps.
- Credit card cash advances accrue interest immediately and often include additional fees.
- Cash advance apps offer small loans, generally repaid by your next paycheck, but may charge high APRs.
- A cash advance can negatively affect your credit score by increasing your credit utilization ratio.
- Consider building an emergency fund to avoid the high costs associated with cash advances.
Understanding Different Types of Cash Advances
Cash advances come in several forms, with some being more costly than others.
How Credit Card Cash Advances Work
The most common cash advance involves borrowing against your credit card’s line of credit. You can withdraw the money at an ATM or, in some cases, use a check that you deposit or cash at a bank, commonly known as a convenience check. Credit card cash advances usually carry an interest rate that is higher than the rate for regular purchases on that same card. What’s more, the interest typically begins to accrue immediately, with no grace period.
These cash advances often include a fee as well, either a flat rate or a percentage of the advanced amount. Additionally, if you use an ATM to access the cash, you might be charged a small usage fee.
Credit card companies treat cash advances as separate from purchases, with separate balances on your account statement. Your monthly payments can be applied to both balances, but if you only pay the minimum amount due, the card issuer is allowed by federal law to apply it to the balance with the lower interest rate. As that is invariably the rate for purchases, the cash advance balance can sit and accrue interest at its high rate for months.
Any payments you make that are over the minimum must first be applied to the highest interest balance, so paying more than the minimum will help you reduce your debt faster.
In most cases, credit card cash advances do not qualify for no- or low-interest-rate introductory offers. On the plus side, they are quick and easy to obtain, making them potentially useful in a financial emergency.
Using Cash Advance Apps: What You Need to Know
Cash advance apps like Varo, Payactiv, MoneyLion, Dave, EarnIn, and Empower are another option today. They typically offer advances of $1,000 or less and must be repaid within a short time frame, such as 30 days or when you receive your next paycheck.
The interest rates these apps charge also tend to be high, over 100% in some cases when expressed as an annual percentage rate (APR). Plus, you may have to pay other fees.
Expensive as they may be, cash advance apps tend to charge far less than payday loans.
Exploring Merchant Cash Advances for Your Business
Merchant cash advances are issued to businesses in need of quick cash to fund their activities and are often repaid out of the company’s credit card and debit card receipts, sometimes on a daily basis as that money comes in. As such, they may be considered an advance against future sales rather than as a loan. They are often easier and faster to get than traditional business loans.
Payday Loans vs. Payday Alternative Loans: A Comparison
In consumer lending, the term “cash advance” can also refer to payday loans issued by specialized lenders online or in local storefronts. Based on the borrower’s next paycheck and often limited to $500 or less, these loans are characterized by sky-high interest rates or fees, sometimes as high as 400% in APR terms. For that reason, payday loans are outlawed or restricted in many states.
Some banks and credit unions now offer payday alternative loans (PALs). These are also small, short-term loans but with much more affordable rates. They typically range from $200 to $1,000 and need to be repaid within months.
Some employers offer payday loans or advances on paychecks as a service to their employees. Terms vary, but often no fees or interest are charged. The Payactiv app mentioned above is also used for that purpose.
Tip
As an alternative to ever needing a costly cash advance, consider building up an emergency fund in a liquid account that you can draw on if you need to.
How Cash Advances Affect Your Credit Score
A cash advance can impact your credit score in several ways.
First, if you take the advance from a credit card, it will raise your outstanding balance, which will in turn raise your credit utilization ratio, a measure that credit scoring models take into account in calculating your score.
If you owe $500 on a card with a $1,500 limit, for example, your credit utilization ratio is about 33%. However, if you then take out a $300 cash advance on that card, the balance will jump to $800, resulting in a credit utilization of more than 53%. Generally speaking, the scoring models and lenders favor a credit utilization ratio of 30% or less.
If you have a higher credit limit or multiple cards, that $300 will affect your overall ratio less. In late 2023, Experian reported the average American credit card limit at $29,855, so $300 more in debt may not impact much.
Where a cash advance could hurt your credit score is if the interest builds up to an extent that you are unable to repay it.
Weighing the Pros and Cons of Cash Advances
Except for costly products like payday loans, a cash advance can be a reasonable option for someone who has an emergency need for money and limited resources for getting it—especially if they have a realistic plan for paying the money back within a short period.
But cash advances are a bad idea in these situations:
- Just before declaring bankruptcy. Credit card debt does not magically disappear in bankruptcy. Your creditors and a judge will examine your debts, including the dates and types. Once you have any inkling that you may be filing for bankruptcy, credit card use of any kind can be considered fraudulent. A cash advance immediately prior to filing is very likely to be challenged by the card issuer, and that account may be excluded from the debts that are forgiven in bankruptcy.
- To pay a credit card bill. A cash advance is an expensive way to pay bills of any kind. Given the immediate interest charges and added fees, using one to pay a credit card bill is likely to sink you even deeper into debt.
- To buy something you can’t afford. Using a cash advance, or any other form of borrowing, to pay for something you can’t afford in the first place is never a good idea.
Is a Cash Advance a Good Solution for Emergency Funding?
A cash advance comes with hefty interest rates and fees, so you may want to consider other alternatives, if at all possible. In an extreme situation, a cash advance is fast and accessible; just make sure you have a plan to pay it back quickly.
What Is the Limit on a Cash Advance?
In terms of credit cards, your card issuer will set a limit on how much money you can borrow as a cash advance. Typically, that will be a percentage of your card’s total credit limit. For example, if your credit limit is $10,000, and your card issuer caps cash advances at 30%, you could borrow $3,000 in total. Note that many credit card companies also have a daily limit, often a few hundred dollars per day.
What Is the Difference Between a Credit Card Purchase and a Cash Advance?
The primary difference between a standard credit card purchase and a cash advance is that cash advances begin accruing interest immediately. In contrast, credit cards typically offer a grace period between the purchase date and the payment due date. Cash advances also have transaction fees and higher interest rates than credit card purchases. For example, one widely held card recently charged from 21.49% to 28.49% on purchases, but 29.99% on cash advances.
The Bottom Line
Cash advances are small, short-term loans available from various sources like banks and credit cards and through apps. They can be ideal for emergency situations due to their accessibility. However, high interest rates and fees associated with cash advances can make them an expensive option, potentially increasing overall debt if not managed properly and negatively impacting credit scores. If they become a habit, or if you find you regularly need a cash advance to make ends meet, then some serious budgeting and spending changes could be in order.
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