Understanding Cash Advance Loans
Cash advances are short term loans you can get from a bank or lender, and is provided by most credit card and charge card issuers as a service that allows their cardholders to withdraw an amount of cash (to a certain limit). These cash advances usually have steep interest rates, fees, or both. However, they remain attractive to people who need to borrow money as these feature quick approval and instant funding, making it an instant relief for urgent or fast cash needs.
Types of Cash Advances
Cash advances come in many forms, but a usual trait is that they have very stiff interest rates and fees. In addition, the interest also compounds daily. This means that beginning from the day the cash is borrowed, the interest keeps growing and combining until the day it is paid off.
Credit Card Cash Advances
A credit card cash advance is the most popular type of cash advance. By borrowing on a line of credit using a credit card, you can withdraw the amount via an automated teller machine (ATM). Certain card companies also issue and deposit cash advances through checks, and then they are cashed at a bank.
Credit card cash advances usually have high interest rates, which are even higher than rates you see on regular purchases. On average, you will pay around 23.53% – this is around 8.54% higher than the average annual percentage rate (APR) for purchases. On top of that, the interest grows immediately, meaning there is no grace period.
In addition, credit card cash advances usually also include a fee. It can either be a flat rate or as a percentage of the amount you took in advance. What’s more is that if you use an ATM to get the cash advance, it often comes with a small usage fee as well.
Together with separate interest rates, you may also encounter a separate balance from credit purchases, except the monthly payment may be applied to both balances. However, it should be noted that if you are only paying the minimum amount, federal law allows the card issuer to apply that to the balance that has the lower interest rate. As that is the case, it means the cash advance balance could eventually accrue high interest rates for months and months due to the invariable rate.
In a nutshell, there are both really good pros and cons for this type of cash advance. On one hand, most credit card cash advances do not qualify for introductory offers such as zero interest or low interest rates. On the other hand, they’re really easy to get – this is great for people with immediate needs and know they can pay this loan just as quickly.
Merchant Cash Advances
Merchant cash advances are small business financing options that often have short payment terms, usually at 24 months or less. They are loans that companies or merchants get from banks or alternative lenders, and are paid in small regular payments that are usually paid out during each business day. Small companies and businesses with not so great credit can use these merchant cash advances in financing their activities. In some cases, these advances are paid for via future credit card receipts, or even using a portion of funds the small business would gain from sales.
Merchant cash advances do not use the business or company’s credit score to verify credit worthiness. Instead, the lenders survey this by looking at several data points, such as how much the merchant earns via online accounts like Paypal.
There are three merchant cash advance repayment methods:
- Split Withholding – The credit card processing company splits card sales between the finance company and the business based on the agreed percentage (usually falling between 10% to 22%). It is also the most common and preferred collection method due to its seamlessness.
- Lock Box Withholding – Also known as Trust Bank Account Withholding. Here, all the company’s credit card sales are deposited into a bank account the financing company owns or partners with. The agreed percentage is then forwarded to the business via wire transfer, Automated Clearing House (ACH), or electronic funds transfer (EFT). It’s the least preferred method as it usually involves a one-day delay for a business to receive their credit card sales proceeds.
- ACH Withholding – There are two methods to this. First is when it’s structured as a sale, wherein the financing company gets the credit card processing information, and then deducts their share directly from the business’s checking account using ACH. Second is when it’s structured as a loan, wherein the financing company debits a fixed amount each day, regardless of the amount of sales the business received that day.
Payday loans are small, short term, unsecured loans. They may also be called different names, such as payday advance, payroll loan, salary loan, short term loan, small dollar loan, or cash advance loan, and they are issued by special payday lenders. The loan amounts are in a range of $50 to $1,000, and are accompanied by fees that are usually $15 per $100 borrowed, as well as interest rates of 100% or more.
Instead of referring to a borrower’s credit score when it comes to determining the loan amount, the lender instead bases on local state regulations, as well as the applicant’s regular paychecks. Once the loan is approved, the borrower receives the amount from the lender in cash. In cases when the transaction is an online one, the lender deposits money electronically into the borrower’s checking or savings account.
Payday loans are short-term – to be paid back on the borrower’s next payday, hence the name. However, if they want to extend the loan, then they will be charged an additional interest, and is subject to approval. Unfortunately, a lot of people take that risk. In fact, according to a study by the Consumer Financial Protection Bureau (CFPB), around 80% of all payday loans are rolled over within 30 days of the previous loan.
A good thing about payday loans is that its process is quicker although a little more complex, compared to securing a credit card cash advance. When getting a payday loan, the borrower writes a postdated check addressed to the lender for the amount needed, including any and all fees. In turn, the lender issues the borrowed amount. They will then wait for the borrower’s payday in order to cash their postdated check. These days, some lenders with access to more advanced technology would instead ask their borrowers to sign an agreement so there will be automatic repayment or debit coming from their bank accounts. Lenders would also usually ask borrowers to provide both proof of income and a form of personal identification when they apply.
There are some employers that offer their employees the benefit of having payday loans or advances on their paychecks. In these types of payday loans, while terms vary, often there are no fees or interest involved.
Direct Deposit Advances
Direct deposit advances are another form of cash advance, wherein banks can give a customer an advance based on their direct deposits. And then, when the deposit of that amount is actually made, the bank can then retrieve the loan as well as its associated fees. For most lending cases, the repayment for this type of cash advance can be taken out of the account before any other automatic payments, checks, and charges are allowed to post. However, it should be noted that as of 2014, many major banks have already discontinued this practice as many people have filed complaints about fees from such cash advances.
Bank members with qualifying bank accounts are usually allowed to have a line of credit up to $500. There is an average fee of $10 for every $100 borrowed.
Advanced Cash for Meeting Your Needs
It’s common to sometimes end up suddenly needing cash unexpectedly. Even the most responsible adults may find themselves stuck in such situations when you need money quick. When this happens and it cannot wait until the next payday, getting a cash advance is a great option. It helps you get the money you need instantly, provided you can pay it back once your next paycheck comes.
Here are a few possible reasons for needing a cash advance:
- Unexpected high bills
- Emergency medical needs
- Helping out a family member
- Your car broke down
Because getting a cash advance does not have any credit requirements or background checks, its process is simple. All you need is a steady and dependable source of income, and a checking account. It will only take you a few minutes to apply, and you get the cash instantly.
To qualify for an instant cash advance, all you need are the following documentation:
- Proof of employment or source of income going back at least 3 months or more
- A post-dated check from your checking account
- Identification that proves you are 18 years or older and are a legal citizen
Here are some of the best reasons in choosing a cash advance:
- No credit checks or requirements
- Fast approval and easy to get
- Short term and relatively small, making it easy to pay off by your next paycheck
Will Cash Advances Hurt Your Credit Score?
It’s easy and understandable to be afraid of taking out a cash advance – this is especially true if you don’t know how it could affect your credit score. While cash advances have no direct impact to your credit or credit score, it can still affect it indirectly in several ways.
First, you should know that taking the advance via a credit card will raise your outstanding balance. In turn, it will raise your credit utilization ratio, which is the way credit scoring models measure and use in calculating your score. For example, owing an amount of $500 using a credit card with $1,500 limit means your credit utilization ratio is 30% – a pretty good ratio. Now, if you then take a $300 cash advance on that same card, then your balance will then be $800. This means your credit utilization is now 53% because $800 is roughly 53% of $1,500. As utilization rates are used in calculating credit scores, a high rate becomes a big indicator of credit risk. As such, your credit score becomes affected negatively whenever your ratio goes over 40%
Next, as mentioned previously, cash advances often come with a high interest rate on top of certain fees. If these affect your ability to pay the monthly charges on time, then it could affect your credit score badly as well. In addition, if the cash advance puts you over your card’s credit limit, it can also lower your credit score. Remember that even after you have paid down the balance, your credit report will still show the highest balance reported. Any potential lenders will still see that you went over the limit in the past, which may possibly hurt your ability to get new credit this time.
Pros and Cons of Cash Advances
Getting a credit card cash advance is a great option for people who suddenly have an emergency need for money but have limited resources in getting that money. This is an especially good way when that person is responsible enough to have a clear, reasonable plan in paying the money back as quickly as possible. For example, it can be a better option rather than a payday loan or a car title loan, since these loans usually come with steep triple-digit interest rates, and there is a greater payoff flexibility that comes with credit card debt.
While there are clearly many pros to taking a cash advance, always remember that it could also be a bad idea under certain conditions. For example:
- You are about to file for bankruptcy. Filing for bankruptcy does not automatically clear new credit card debt. In fact, your creditors as well as a judge will examine your debts including the types and the dates involved. If you know or you are leaning towards filing for bankruptcy soon, then using your credit card (including taking out a credit card cash advance) is then considered fraud. A cash advance right before filing is suspicious and will most likely be challenged by the card issuer. In addition, that account may also be excluded from the debts which are forgiven in that bankruptcy filing.
- You want to pay a credit card bill. A cash advance is quite an expensive way to pay bills, let alone a credit card bill. You simply can’t ignore the risk of falling into a revolving debt, as the potential of paying an amount many times over due to many interest charges is very real and very scary. On top of the higher interest rates, you will also encounter many additional fees that do not come with everyday credit card purchases.
- You want to buy something you want but can’t afford. In reality, any kind of debt for something that goes beyond your means is a bad idea on its own. Going into debt for unnecessary yet expensive desires is financially dangerous, and could even affect you emotionally in a bad way. People who bank on instant gratification via these expensive purchase only get a temporary emotional lift. Eventually, emotional spending may lead to regret, and even other debilitating emotions, including stress, anxiety, and depression, once they face the reality of having that much debt.
Fees and Collaterals Involved
A cash advance is a quick and secure way of getting certain amounts of cash quickly, and is a good option for emergencies which you know you are able to pay back by your next pay day. However, before proceeding with getting a cash advance, make sure to know the fees involved. The following is a list of fees and other types of collaterals that you might encounter:
- Early Repayment Fee – If your loan has an early repayment fee, you will have to pay this additional fee if you pay your loan too early.
- Late Repayment Fee – Most loans will have a late repayment fee which you need to give when you are behind your payments. In some cases, you may even need to pay the entire fee again when you miss the payment date.
- Membership Fee – In some cases, a company may offer membership, which then would also require a fee.
- Account Handling and Fine Print – As in all contracts, it is important to read the fine print. Whenever going through a contract, make sure to read everything as there may be things you want to clarify first. If you do not understand any part of your loan contract, it’s always a good idea to ask about it.
- Bounced Check or Debit Fees – When you sign off on a loan, make sure your bank account is in good standing. If your postdated check bounces, you will have to pay your lender a certain fee.
- Collateral Requirements – Though most cash advances are generally small, there may be a time you’ll be required to sign off on a collateral. If not done properly, whatever collateral you listed will be taken from you should you miss out on payments.
Take Cash Advances Responsibly and Only When Necessary
During emergency cases where you need quick cash for a truly necessary reason, and you have already looked to other options but to no avail, then a cash advance may be your best route. However, you should take these cash advances responsibly, and take them only when necessary. As in some of the examples above, there are certain situations wherein taking a cash advance could do more harm than good.
If there really is no other option, then see these tips in order to minimize the potential damage you could incur to your finances:
- Find out any and all fees involved, as well as the APR, and your limit for the cash advance.
- Only take a cash advance for what you need. Remember that this is not a way for you to get what you want so you can have some “extra cash” in an instant.
- Do not get a cash advance with a credit card that already has an outstandingly high balance. When you use too much of your available credit, your credit score will suffer.
- Always pay back the advance the soonest that you are able to. Cash advances, no matter what type, do not give you an interest-free grace period.
- Never ever make a habit out of taking cash advances. Once or twice a year for sudden emergencies is fine. Taking a cash advance as often as you could may make you end up living paycheck to paycheck – or worse – you could end up in even more debt.
Things to Consider
With all the points stated above, here is a list of four fundamental questions to ask yourself before getting a cash advance:
- Can I pay this back by my next pay day? It’s a question you need to answer honestly. If you can guarantee to yourself and to your potential lender that you can and will pay the amount back once your next paycheck comes, then go ahead and take out that quick cash advance.
- Is there no other way for me to deal with this? Cash advances are great when used – and paid back – properly. Make sure to consider all options available to you.
- Is this absolutely necessary? Taking out a cash advance is fine for emergencies and if done sparingly. If you are doing this for a want rather than a need, it’s most likely a bad idea.
- Do I need help? A typical person interested in a cash advance is often a cash-strapped person who may possibly need a financial makeover. If a cash advance happens more often than expected, you may need to consider some lifestyle and spending changes.
In a Nutshell
Cash advances are great when used sparingly and responsibly. They can be the best short-term solutions when faced with emergencies, and can help you get by until the next payday comes. However, if they are starting to become a habit and you find yourself regularly getting cash advances just to make ends meet, then it’s time to take a step back. Start budgeting drastically and change your spending habits, or end up facing more debt than you could handle. While it’s fixable, it won’t be easy or cheap. The bottom line here is making good, informed, responsible decisions.