Reviewed by Michael Lefler A cash advance is a short-term loan from a bank or a payday lender. This loan is typically due in full by your next paycheck.
This type of loan is intended to help you get through an unexpected expense like paying for a car repair without having to take out another credit card or commit to paying back a more significant debt over time. Let’s clarify how it works and what are cash advance types.
- How Does a Cash Advance Loan Work?
- Types of Cash Advances
- Is a Cash Advance the Same as a Payday Loan?
- Cost of a Cash Advance Loan
- Pros and Cons of Cash Loans
- Do Cash Advance Loans Impact Your Credit Score?
- Is a Cash Advance Loan a Good Solution for Emergency Funding?
- Alternatives for Cash Advance Loans
- Bottom Line
How Does a Cash Advance Loan Work?
A cash advance loan is easy to get and its working process contains only three steps:
- Online application or at a local branch.
- Funding within 24 hours of approval.
- Loan repayment in full when you get paid.
Types of Cash Advances
Cash advances are an effective financial solution, but their types can be confusing. So let’s break down the different kinds of cash advances and how each one works:
Credit Card Cash Advances
A credit card cash advance is just like a loan, but you’re borrowing from your credit card company instead of going to a bank or other financial institution. As a result, the interest charges are usually higher than for regular credit card purchases (average of 21.2% APR).
This method doesn’t involve the processes required by a traditional loan. These cash advances are available at the ATM, in person by visiting your bank or through convenience checks.
Merchant Cash Advances
Merchant cash advances (or MCAs) are used by small businesses that need to make big purchases but don’t have enough cash to do it. Third-party credit card companies provide these advance loan products. Usually, high-risk businesses that might have trouble getting traditional loans use them to buy inventory or equipment upgrades.
Payday Loans
Payday loans are small, short-term loans that you can use to cover unplanned or minor expenses like car repairs, groceries or even medical bills. You can get from $100 to $1,000 with a maximum loan term of 30 days. Unfortunately, payday loan lenders often charge incredibly high service rates—up to 400% APR. So it’s essential to understand what you’re getting into before applying for one.
Is a Cash Advance the Same as a Payday Loan?
A payday loan is just a type of cash advance you can get from an alternative lender. Although they both are short-term loans and can be used for similar purposes, there are some essential differences between them.
A cash advance is typically a short-term loan that you take out from your credit card, if you have enough balance on your account, or as a payday loan. You borrow the money to pay for something unexpected like an emergency car repair or medical bill or make a purchase you can’t afford right now.
Cash advances work like installment loans with monthly payments and repayment terms of up to 24 months. Plus, such loan products don’t have a grace period. It means you will be charged interest starting from the date you withdraw a cash advance.
Also, cash advances are typically capped at a percentage of your card’s credit limit. For example, if your credit limit is $15,000 and the card caps your cash advance limit at 30%, your maximum cash advance will be $4,500.
On the other hand, a payday loan is intended for people who need money fast and can’t wait until their next paycheck arrives. Payday loans online are generally easier to get than cash advances because they don’t require good credit scores or collateral. Instead, you just have to prove that you’re employed with regular income so the lender knows they can recoup their investment quickly after paying off the loan.
Cost of a Cash Advance Loan
The lender determines these cash advances’ costs so it can vary from one loan provider to another. The application fee is charged when applying for a loan. Typically, you’ll pay $10 to $30 for every $100 borrowed. This cash advance fee can be paid upfront or rolled into your loan amount. For example, if you borrow 700 dollars, you’ll have to pay around $140 with the average fee of $20 per each $100.
Pros and Cons of Cash Loans
A cash advance loan might sound like a good thing, but there are pros and cons to consider before taking out such a loan product.
Pros:
- They’re fast—you can often get the money you need within 24 hours.
- They’re easy to get—no credit check, so you don’t have to worry about being turned down for bad credit.
- They’re convenient—you can apply online or in person at a storefront.
Cons:
- You’ll pay more than other types of loans because they’re unsecured (i.e., not backed by collateral) and riskier for lenders.
- You’ll be charged high-interest rates that can add up quickly if you don’t pay off your loan in full within a short period (two or four weeks).
Do Cash Advance Loans Impact Your Credit Score?
Borrowing a fast cash loan won’t directly affect your credit score. However, it may impact it negatively in other indirect ways.
When you apply for a cash advance loan, the lender will check your credit history and assess how likely you will repay the loan. They can make it via major credit bureaus that give lenders all your financial information. It is called a “hard credit check” that might appear in your credit report.
Next, if they decide you are a reasonable risk, they may accept and process your application. Then, if you repay your loan on time, it won’t affect your credit score.
However, if they don’t think you are a reasonable risk (for example, if they see that you have taken out many payday loans in the past), they may decline your request for a loan and not process it. They may also offer you a smaller amount than you requested to protect their interests should you default on the loan or fail to pay it back on time.
Is a Cash Advance Loan a Good Solution for Emergency Funding?
Cash advance loans can be a good solution for some people, but they’re not for everyone. For example, if you take out a cash advance loan and don’t pay it back on time, you could pay more in interest than what you borrowed in the first place.
Also, the amount of money you borrow will impact the interest rate charged by your lender. So if you only need a small amount of money but don’t want to pay much in interest, take out another financial product instead of a cash advance payday loan.
Alternatives for Cash Advance Loans
Do you want to avoid issues with getting a cash advance loan? Try these alternatives:
Borrow Money from Relatives or Friends
If you don’t like the bureaucracy of borrowing money from financial institutions, speak with your friends or family members. You could pay interest rates or late payment penalties by taking out some extra dollars from your sister (brother) or best friends. However, if you want legal borrowing, you could close a loan agreement and set certain clauses. Remember: if the loan amount exceeds $10,000, there are several legal charges applied.
Car Title Loans
Car title loans are secured loans that use your car as collateral. It means they’ll hold your vehicle until you repay the loan in full. If you default on the agreement and can’t cover it on time, the loan provider will seize your vehicle and sell it to recover their money.
Personal Loans
Personal loans are considered long-term financial solutions and have lower interest rates (maximum APR is 35.99%) than cash advances. The maximum loan amount is $15,000 or more (up to $35,000), with a maximum repayment term of 60 months.
Bottom Line
Cash advances are an excellent solution if you need some extra dollars till your next paycheck reaches your bank account. But you should take care of rates and additional charges that come up if you don’t repay the debt on time. Be it a payday loan or a credit card cash advance, make sure you are able to manage the lump sum payment on the due date.
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