What Is a Cash Advance?
Cash advances are short-term loans typically obtained through a credit card. When you get a cash advance, you borrow money against your credit card’s available credit, but you also have to pay a cash advance APR and a cash advance fee. Cash advances may be subject to a different credit limit set by some issuers.
Cash advances are expensive and should only be used as a temporary fix because the charges and interest you pay are usually proportional to the size of your withdrawal and the length of your payback. Due to issuers’ maximum cash withdrawal limits, more than a cash advance might be needed to meet substantial expenses. Some lenders, however, have no minimum balance.
Varieties of Payday Loans and Advances
In-Store Cash Advances
Many credit cards allow cardholders to make cash withdrawals from their accounts. This type of credit is similar to a short-term loan in that the borrower can get cash or a cash equivalent for up to 20% or 30% of the card’s credit limit. With some cards, you can withdraw as much as fifty percent of your credit line.
Funds Advances for Businesses
Small business owners can get merchant cash advances (MCA) loans based on the company’s sales history and projected sales volume. If your company processes a significant volume of daily credit and debit card transactions, you may meet the requirements and receive the money within a few days. A straightforward application process means quick access to your money.
Payday loans allow you to borrow money against your next paycheck. Payday lenders typically want recent pay stubs or other verifiable proof of income. You can get your hands on your money either in person or online. On the other hand, payday loans have a predatory reputation and should be avoided.
How Payday Loans Operate
There is no standard procedure for getting a cash advance because it depends on the lender and the type of loan taken out.
In-Store Cash Advances
A cash advance can be obtained through an ATM, the card’s issuing bank, or a convenience check. Access checks are included in your monthly credit card statement and are another name for these frequent mailings.
Some retailers may treat certain credit card purchases as cash advances. A cash advance may be processed for the following types of transactions:
The cash is put in at the account opening
Coverage for overdrafts when using a credit card as a guarantee for a checking or savings account.
- Money orders, traveler’s checks, or foreign currencies
- Gold or electronic money
- The Use of Bank Wire Transfers
- Bingo cards, poker chips, and bets on the horses
- A few prepaid and gift cards
You will be charged interest that accrues daily from the date of the cash advance and a fee for the service upfront. Most credit card issuers also limit the amount of your available revolving credit that can be used for cash advances. This figure can be found on your monthly statement or viewed online.
Invoice Discounting (IDD)
Rather than coming from your credit card company, the payment processor for your credit and debit card sales is the distinct entity with whom you’ll work to secure a merchant cash advance. Merchant cash advances are unlike traditional loans because they do not have interest fees. Alternatively, your repayment will be calculated as a percentage of your daily gross sales. You must repay between 1.2 and 1.5 percent of your daily sales.
Suppose you borrow $15,000 at a factor of 1.3. There may be origination fees added to the $19,500 loan balance.
Therefore, if your firm has a surge in sales, your daily payment may climb, further limiting your company’s liquidity. If daily sales decrease, so will the payouts. During the pandemic, complaints were filed with the FTC alleging that not all MCA processors performed the “true-ups” promised to lower payments when sales dropped.
Payday loans are unsecured, short-term loans typically taken out in amounts of $300 or less. The borrower provides a personal check with a future date or authorization for electronic withdrawal. A borrower’s next paycheck typically secures payday loans, but a pension or Social Security may also connect them.
Although the loans are often around $500, the associated costs can be relatively high. Borrowers typically pay $10 to $30 in fees for every $100 they take out through a payday lender. The sum of these charges on the closing date increases the loan’s principal.
If you borrow $400 and pay a financing charge of $15 per $100, you’ll owe $460 by the time you get paid again, which might be as soon as two weeks. If the interest on this loan were expressed as an annual percentage rate (APR), it would be much higher than 390%.
If a borrower cannot repay a loan plus costs in total, a lender may extend the loan’s term or grant renewal in some states. Finance costs, interest, late fees, and insufficient funds fees may apply, depending on where you live. When you factor in how much interest payday loans charge, other solutions become much more attractive.
Credit Card Options for Payday Advances
A few strategies exist to lower the interest rate on a credit card cash advance. The fees associated with credit cards often come in the form of a percentage or flat rate. If you know you’ll need a cash advance shortly, you may want to look into a credit card like the Capital One Venture Rewards Credit Card, which charges only 3% on cash advances rather than the 5% or more charged by many other cards. With most credit cards, the interest rate you pay on cash advances differs from the rate you pay on purchases. Always look around for the best interest rate on cash advances.
In conclusion, you should avoid getting a cash advance unless you’re completely out of options. Getting a cash advance may seem like a good idea, but the high fees far outweigh any benefits. When you’re in a bind and have no other options, a cash advance may be necessary; make sure to pay it off as soon as you can, as interest typically begins accruing on the day the advance is made and is far higher than the card’s standard.