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What Is a Cash Advance Loan and How Do You Make The Most of It?

Man holding Cash

A cash advance is a form of short-term debt that you can get from a traditional or alternative lender. In most cases, it refers to a type of borrowing that a credit card holder can get from their bank or other credit card issuer without a prior application and a further hard credit check. Such loans can be a great option for people in need of emergency cash. Nowadays, it’s even possible to get cash advance loans online. They don’t require extensive paperwork and can be obtained from your couch in a matter of minutes. However, cash advances also come with several drawbacks and risks. Let's find out what is a cash advance loan and whether it suits you.

What Is a Cash Advance?

A typical cash advance is an act of borrowing money against your available credit card balance. The process of obtaining it doesn't involve any online or offline application. All you need is to have a valid credit card and ensure the issuer allows this form of borrowing. If yes, you can simply withdraw money that is available within your credit limit and use it for any personal needs.

Although a credit card cash advance is considered a short-term loan, you can repay it either in full within several weeks or prolong its terms and make only minimum payments. However, cash advances are an expensive form of borrowing. Therefore, you should use them cautiously and strive to repay them within the shortest possible time.

However, a cash advance may also refer to other forms of short-term debt with fast approval and funding times and lenient requirements.

Other Types of Cash Advances

Below are the most popular options.

Merchant Cash Advances

These cash advances are available to companies or merchants with less-than-ideal credit. They are offered by banks and alternative lenders and take into consideration the company's transactions on online accounts. Businesses can use merchant cash advances to finance their activities. The repayment is typically made with a portion of the funds that the company will get in its online account for future sales.

Payday Loans

A payday loan is a form of borrowing that a customer can get from a payday lender against their next salary payments. These loans require a prior application but have relaxed requirements and fast funding times. You can apply for these cash advance loans online in 5 minutes and receive the funds within one business day. More than that, they are available to people with any credit score. 

Payday loans differ from paycheck advances that you can get from your employer. A payday loan must be repaid in full by your next paycheck with additional lender fees, which are typically expensive. However, they can be a lifesaving option when you don't have a credit card and need money urgently.

How Does a Cash Advance Loan Work?

Payday loans typically work like other personal loans. You choose a lender, check out its requirements, and fill out a form to get approved. If a lender decides to give you the funds, it will send you an offer via email. You can accept it by signing a loan agreement and receive the money via direct deposit. Then, you must repay the funds within the agreed-upon terms.

Credit card cash advances work differently. People often think that they are almost like regular purchases they make with their credit cards. But unfortunately, credit card companies separate these two types of transactions.

When you pay for a good or service by card, there's typically an interest-free grace period. If you manage to repay the funds within this period, you won't overpay anything to your credit card company. But when you withdraw money from your credit card balance, interest charges accrue at the same moment.

Cash advances don't have any set due date or monthly payment amount. A cardholder can repay the funds at their preference, either in one lump sum or by making just minimum payments. However, interest rate charges apply daily, making your loan quite expensive in the long run.

Additionally, a cash advance fee is often much higher than an interest rate on your regular purchases. Thus, cash advances carry more financial burden to a cardholder. Plus, processing fees may apply, which makes a cash advance even more expensive than a regular credit card debt. That is why you should repay your cash advance balance as soon as possible to avoid debt accumulation.

How to Get a Cash Advance

When we speak about regular cash advance loans, the process of obtaining them is similar to other personal loan options. You simply fill out an application form online or in a lender's store and wait for a loan approval decision. It typically takes from a few hours to one business day for a lender to review your details and send you a response. If positive, you need to read and sign a loan agreement to accept the offer. After all, the money will be transferred to your bank account via direct deposit.

But credit card cash advances don't require you to apply and wait. All you need is to have a valid credit card that can be used to withdraw money from its balance. There are several ways to complete credit card cash advance transactions:

  1. By using an ATM. It's better to use an ATM of a bank or credit union that issued your card to avoid an additional transaction fee. All you need is to put your card into an ATM, enter your PIN, and withdraw the cash advance amount you need.
  2. By visiting a store of a credit card company. This option doesn't require you to know your PIN. You just need to provide proof of identity.
  3. By phone. Some companies allow you to request a cash advance by phone. This way, the funds will be transferred from your credit line to a specific checking account.

Typically, credit card companies allow cardholders to get from $100 to 30% of their available credit limit with a cash advance. This amount includes both your loan principal and a cash advance fee.

What Are Cash Advance Fees and Rates?

A credit card cash advance fee can differ from company to company. However, you shouldn't expect it to be low. Some companies may apply a flat fee, while others set a percentage of the amount a borrower gets. The sum may range from $5 to $10 or between 3% and 5%, whatever is greater.

Your cash advance amount plus the fee will be deducted from your available credit line. Thus, if you withdraw $500 with a 3% fee, the total amount that will be deducted equals $515. In addition to processing fees, the issuer will charge an interest rate. The average cash advance APR is 24.8%. However, it can be lower or higher depending on the issuer. Sometimes it may be as high as 36%.

When it comes to cash advance loans from alternative lenders, an APR is usually higher. On average, borrowers pay an extra $10 to $30 per each $100 obtained. Thus, if you're going to borrow $500, your total loan cost can be between $550 and $650. A cash advance APR is 260% to 782%. But keep in mind that credit card cash advance terms can be expanded at your discretion, so its total cost may be even higher in the long run.

Pros and Cons of Cash Advance Loans

On the plus side, a cash advance is a fast and easy way to borrow money. It doesn't involve a hard credit check and can be obtained with any credit within one business day.

Some types of cash advances can be obtained without any application. When you make a withdrawal from your credit card, you will receive money on hand right away without filling out forms and waiting for an approval decision. Also, credit card cash advances offer borrowers more flexibility. They allow a cardholder to choose a suitable repayment schedule and don't set a strict due date.

But there are also several drawbacks that you need to be aware of before getting a cash advance. These cons include high interest rates and, in some cases, additional processing fees. Thus, a cash advance should be used cautiously. You need to have a clear repayment plan and strive to turn the money back as soon as possible.

Does a Cash Advance Loan Affect Your Credit Score?

When you simply get a cash advance, it doesn't have a direct impact on your credit score. However, a credit card cash advance can affect some indicators that determine your credit rating. When you take out a cash advance, you change the ratio of used credit to the total credit limit available. This way, your credit card debt increases and makes your credit utilization rate grow too. If the ratio becomes over 30%, your credit score may drop.

Additionally, obtaining a high-interest debt can affect your ability to pay bills or fulfill other debt payment obligations. It may result in late or missed payments and make your credit score go down.

When it comes to cash advance loans, they can impact your credit history if you don't repay them on the due date.

Alternatives to Credit Card Cash Advances

There are lots of reasons why you may need emergency cash. But there are lots of options too. Explore them all and choose the one that will work better for you.

Personal Loans

A personal loan is a loan offered by a traditional financial institution. It allows you to get a lump-sum deposit into your bank account and use the money for various personal needs. A personal loan is typically unsecured debt that has a fixed interest rate. If your credit score is good, you can get a much lower rate compared to those on a cash advance.

Payday Alternative Loans

Payday alternative loans are offered by some credit unions to save their members from high-interest debt. They work similarly to regular payday loans but have lower rates and expanded loan terms. To get one, you need to be a credit union member.

Borrowing from Family/Friends

Turn to your family or friends and ask whether they can help you at the moment. This way, you will be able to get a loan with low or no interest and repay the funds within the times that are convenient to both parties. 

Tips on Using a Credit Card Cash Advance Loan

There are two main principles that you can stick to.

Borrow as little as possible

This will help you minimize your cash advance cost. Decide in advance on how much money you need, and don't borrow more just in case. The higher your cash advance amount, the more you'll have to repay in fees and interest.

Repay as fast as you can

Remember that cash advances accrue interest on a daily basis. This makes your debt more and more expensive each day. Always have a clear repayment plan and avoid expanding your cash advance terms. Otherwise, you can find yourself in debt that you can't service.

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Liz Flynn

Written by Liz Flynn

Liz Flynn has worked as a full-time writer since 2010 after leaving a career in education. She finds almost all topics she writes about interesting, but her favorite subjects are travel and food. Liz loves the process of researching information, learning new things, and putting into words what others who share her interests might like to read. Although she spends most of her time writing, she also enjoys spending time with her husband and four children, watching films, cooking, dining out, reading, motorsports, gaming, and walking along the beach next to her house with her dog.

Read more posts by Liz Flynn

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