Cash Advance: What is it and Should You Get One?

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

Depending on how dire the circumstances are, you may not have the time and energy to consider options that take more time — and require more paperwork.

But despite their benefits, cash advances can also come with significant costs. Therefore, it is important to understand what cash advances are all about and how much they could end up costing you. It’s also important to be aware of what alternatives are available to you should the need arise.

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 rates and fees. However, the downside is that they allow borrowers to 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 result in an endless cycle of interest accrual. Therefore, it is important to understand how they work and all the parts involved.

Types of Cash Advances

“Cash advance” always refers to some form of borrowing, but there isn’t just one type of cash advance. There are a few common types, but the way each one works is different.

Cash advances by credit card

Credit card cash advances are the most common type of cash advance and involve borrowing against a cash advance limit on your account. Note that there is a cash advance limit with this method, and this limit is usually less than your purchase limit. The cash credit 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 during which card issuers do not have to charge interest for at least 21 days after the payment due date. However, cash advances don’t have that luxury and earn interest immediately after you receive your funds.

payday loan

Payday loans grant individuals small cash advances that are repaid on the borrower’s next payday. These loans usually require proof of income, such as a payslip, to show that the borrower is able to repay the loan. However, other sources of income can also be used with the payday loan to cover the remaining amount.

Payday loans are short-term loans, mostly for small amounts; It is not uncommon for a payday loan to be in the amount of $100. Still, their high interest rates can make payday loans very costly to borrow.

For example, the borrower might be charged a $20 fee 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 when that 20% interest charge is annualized, the APR is over 500%.

To make matters worse, some states allow payday loan extensions. In this case, any amount that the borrower cannot repay by their next payday can be converted into a new loan. Interest charges, late fees and other charges may also apply. And all of this is on top of our aforementioned 500% APR.

Cash Advances from Merchants

Merchant cash advances are a way for businesses to secure the funds they need. Dealer cash advances use past sales or future sales forecasts to determine the amount of the advance. This is similar to payday loan payroll request. Merchant cash advances are a relatively easy way for small businesses to access the cash they need, as the whole process often takes just a few days.

How does a cash advance work?

When you take out a cash advance, you are borrowing an amount that will incur interest and fees associated with the advance. Additional fees may apply, such as B. a cash advance fee. Additionally, cash advances, like credit card cash advances, often have a higher APR than other types of transactions.

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

Try these methods:

  • On-line. Your card issuer may allow you to request a cash advance through their website or mobile app, saving you the hassle of traveling to request an advance.
  • Personally. If you have a bank-issued credit card, you can take the card with you and request 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 request a cash advance this way. If you don’t have a PIN, you can request one; However, your bank may not be able to provide one immediately. Therefore, you may have to wait a few days for your PIN.
  • By convenience check. Your bank may have convenience checks that you can write out or the amount you need as an advance.

costs and fees

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

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

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

There are other fees that you might come across as well. For example, if you request a cash advance from an ATM, fees may apply. This can also be the cash if you request a cash advance in a foreign currency, which in turn can lead to additional fees.

Frequently asked questions about cash advances

Here are answers to some of the most frequently asked questions about cash advances.

  • Will a cash advance hurt your credit?
    • Applying for a cash advance won’t necessarily hurt your credit. However, it will increase your credit utilization, which could hurt your credit if it pushes your utilization too high. In general, you should try to keep your credit utilization below 30%.
  • What is an example of a cash advance?
    • The most common form of cash advance is a credit card cash advance. With this type, you ask your card issuer to extend a cash advance that you have to repay later. For example, you can request a $250 advance from your card issuer. Keep in mind that there is a cash advance fee and most credit cards have a cash advance APR that is higher than the APR on purchases.
  • Is an advance a loan?
    • Yes, a cash advance is a loan. Another term for this is a line of credit, which you may use with your credit card. However, all of these are just terms used to refer to different types of credit.

Our in-house research team and on-site financial experts work together to create content that is accurate, impartial and timely. We verify every single statistic, quote, and fact against trusted primary sources to ensure the information we provide is accurate. Learn more about GOBankingRates’ processes and standards in our editorial policy.

About the author

Bob Haegele is a personal finance writer specializing in topics such as investing, banking, credit cards, and real estate. His work has been featured in The Ladders, The Good Men Project and Small Biz Daily. He is also co-director of Modest Money and dog sitters and walkers.

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