It sounds like a perfect way to score emergency money: take out a short-term loan through a cash advance. But like many financial options that seem too good to be true, this one can be too. While it’s a quick and easy way to acquire funds, a cash advance comes with plenty of restrictions, many added fees and lots of fine print.
Before you opt for that cash advance, here are a few things to know.
What is a cash advance?
A cash advance is a short-term loan that’s available quickly and easily. Cash advances are issued by a credit card company, allowing the customer to borrow against their own line of credit — but cash advances are also offered through apps, banks and other brick-and-mortar outlets.
Cash advances are just that — an advance — to help in an emergency, so repayment is required. How and when that repayment is collected, and what extra fees are charged along the way, depends on the lender.
How does it work?
Applying for and acquiring a cash advance is surprisingly easy. The most popular and common way to acquire a cash advance is through a credit card company. Borrowers may simply call their company and obtain a unique cash advance PIN number that allows them to access cash through an ATM or the bank that’s associated with the credit card. Borrowers can access a cash advance amount up to a percentage of their credit limit — typically between 20 percent and 30 percent. Think of it like making a purchase with your credit card, but instead of buying a meal or an item, you’re purchasing cash for yourself.
When it comes to cash advance apps, users usually provide the app proof of income and a pay schedule, and then allow the app to access their bank account. This allows the borrower to receive the money, of course, but also means the lender can withdraw the amount on your very next payday.
Regardless, a cash advance usually does not require a credit check or any other significant red tape or application processes, making it a seamless way to acquire fast cash.
Cash advances can come with extremely high interest.
When it comes to cash advances, the interest rate is significantly higher than on traditional credit card debt. While the average credit card APR rings in between 21 percent and 25 percent, interest rates on cash advances can ring in as high as 30 percent. And the fees don’t stop there — you’ll likely pay a transaction fee as well as any ATM fees that are required.
Cash advance apps work a little differently. They offer short-term loans of up to $250, $500 or $750 per pay period, depending on the app. While you won’t be charged interest, the service is hardly free, you’ll likely pay a subscription fee for the app, a monthly fee or a transfer fee. Just remember that cash advance apps are often linked right to your bank account, so as soon as that next paycheck is deposited, the money automatically comes out.
Interest accrues immediately.
Traditional credit card purchases offer a grace period, in which customers don’t pay interest between the end of a card’s billing cycle and the payment due date. And if you pay your card balance in full by the due date, you won’t accrue any interest.
With credit card cash advances, interest often begins to accrue the moment the cash hits your hand. Therefore, even if you pay off your cash advance in full at the end of your next billing cycle, you’ll still have to pay that high interest rate — no grace periods here.
It may impact your credit score.
While taking out a cash advance in itself usually doesn’t hurt your credit score, it could lead to a position that results in a lower credit score. With the added debt — as well as the greater interest — your credit card bill will be higher, and if you can’t pay it, your credit score could be negatively affected.
Additionally, taking out a cash advance impacts your credit utilization ratio, as lenders prefer borrowers use under 30 percent of their available credit. When paid off promptly, a one-time cash advance may not push the credit utilization higher, but holding cash advance debt — or continuing to lean on cash advances as a way to cover expenses — impacts that ratio and thus could impact your credit score.
While cash advances are an option when you need cash quickly between paychecks, relying on them to cover financial gaps could impact your credit score and potentially put you on a path to deeper debt — and make it much harder to repay your bills. Leaning on your credit card in a traditional sense (if possible) rather than taking out a cash advance may be the more financially smart choice. But ultimately, making smart financial choices and starting to create a savings account can help cover financial needs.
DISCLAIMER – This content is for educational and informational purposes only, and is not intended as financial, investment, or legal advice.
