When it comes to your spending, unexpected expenses are bound to arise. Perhaps you need some quick cash to pay for a car repair, medical procedure, travel expenses, or another financial emergency. Additional financial aid set aside for such an event should be a priority for your budget plan, but it’s not always possible for people. In fact, according to a recent study by the Federal Reserve, 41% of Americans don’t have money to cover a potential $400 emergency expense.
People who find themselves in a situation where there is no reserve to rely on might be tempted to turn to their credit cards and take out a cash advance. While that may seem like a quick solution, getting a cash advance loan is expensive and dangerous, because it can leave you trapped in a never-ending cycle of debt.
However, If you’re facing a financial emergency and need cash, you might have no other choice. Getting a cash loan advance comes with several drawbacks you need to be aware of. Keep reading to find out more about cash advances and whether it is a good option for you.
What is a Cash Advance?
A cash advance is a short-term loan intended to cover a short-term financial emergency. It is available to consumers through banks or other lenders, but the term usually refers to borrowing a certain amount of cash from a credit card. Cash advances feature hefty fees and interest rates, but they are popular among borrowers because they provide quick and secure funding. There are several types of cash advances, including a credit card cash advance, an employer cash advance, payday advance loans, and more. The most common type is borrowing from a credit card.
The term “cash advance loan” can refer to payday loans, also known as direct deposit loans. A payday loan is a short-term credit that you borrow from online and storefront payday lenders. Fees are typically around 15% or more, and the interest rates go way above 100%. The amount of a loan can range between $50 and $1,000, depending on the lender. Before you get approved, a lender will assess your ability to repay the loan. They review your financial history, previous debts, and the size of your paycheck, rather than relying on your credit score. Upon approval, you receive cash. If the transaction takes place online, the lender makes an online cash advance transfer to your checking or savings account. When searching for online lenders, you can use Snappy Payday loans to make the process stress-free and quick.
Payday Loans: The Rollover
Unlike personal loans that are secured by your home, car or another piece of property, cash advance or payday loans do not use an asset as collateral. As a result, this credit comes with higher fees and rates you need to repay in the space of a couple of weeks. You usually need to pay back the cash you borrowed plus the fee and interest in a single lump sum when the loan becomes due. If you miss the payment, the lender will offer to roll over the loan. In other words, the lender allows you to pay fees and interest only and gives you a few more weeks to pay back the amount you borrowed. However, you pay the interest on the loan all over again. If you still cannot make the payment, the lender rolls over the loan once more, increasing your out-of-pocket expenses.
Unfortunately, payday lenders roll over four out of five payday loans within the first 30 days, according to the Consumer Financial Protection Bureau.
Borrowing from Your Credit Card
Credit card companies offer credit cards that allow you to borrow cash up to a specific limit. These limits are lower than your credit limit, and the money you borrow doesn’t come from your checking account, unlike when using a debit card. The credit card company lends you the money, which means that you need to pay it back along with fees and rates. When you withdraw a certain amount, it is automatically added to your credit card bill, just like any other purchase would be.
You can get a cash advance from an ATM, at the bank, or by filling out a cash advance check. If your credit card has a PIN, you can withdraw the money at the ATM. If you don’t have one, you need to go to the bank, and they will give you the amount available on your cash credit line. This limit depends on your balance, purchases you have made, and other factors. That means that most people won’t be able to take their entire credit line as a cash advance. Therefore, you cannot rely on your credit card to provide you with more than a few hundred dollars in the event of an emergency.
Employer Cash Advances
Some employers offer cash advances on paychecks. You usually don’t pay fees or interest on these advances. If the expense auditor gives you approval, you will receive a cash advance into your checking account. Employers usually limit the number of times you can make a cash advance request.
Merchant Cash Advances
And finally, there are merchant cash advances. Merchants and companies with a less-than-perfect credit score borrow money to fund a business expense. They then pay back the loan with a portion of future sales revenue. A percentage of sales will go toward the lender’s account until the amount gets paid back in full. For example, qualifying merchants and Shopify users can get their cash advance/business loan from Shopify Capital. The remittance rate of Shopify Capital is 10%.
Do Cash Advances Impact Your Credit Score?
Taking out a cash advance does not affect your credit score directly. There is a big “but,” however, in terms of its indirect impact. If you take a credit card cash advance, it will increase your outstanding credit balance. That leads to an increase in your credit utilization ratio. The ideal credit utilization ratio is 30% or less. For example, if your card limit is $2000, and you owe $700, your credit utilization ratio is 30%. But, if you take a $300 cash advance, the balance is $1000. Your credit utilization ratio jumps to 50%, which puts you in the credit risk category and negatively impacts your credit score.
As mentioned previously, a cash advance comes with a hefty fee and interest rate. If you don’t pay it back on time, you will accrue interest that will get you into further debt. If that amount exceeds your credit card limit, it hits your credit score. Your report will always show the highest balance, even after you have paid it off.
Why Should I Avoid Taking a Credit Card Cash Advance?
Getting a cash advance is an easy and convenient way to get some speedy cash. However, it is also one of the most expensive options you have when facing a financial emergency. That’s because there are a variety of expenses that a credit card issuer charges.
Charges to Expect.
- Hefty fees – A credit card company charges a cash advance fee for lending you a cash advance. A fee for credit card transactions can either be a flat rate like $5 or $10, or a percentage of the total transaction such as 3% or 5%. For example, the Chase Sapphire Preferred charges either $10 or 5% of the amount.
- ATM fees – A financial institution charges an ATM fee when you withdraw cash from an ATM.
- High-interest rates – Most credit cards charge higher interest rates for cash advances than for purchases. Therefore, even though you are paying a 15% annual percentage rate for purchases on your card, you will pay 23% on your cash advance. You may be able to offset the high interest rate on cash advances by getting a card that offers a 0% APR on purchases and balance transfers for a set period.
- No grace period – Besides the steep fees and high APRs, there is no grace period when you get a cash advance. The interest starts accruing right away, unlike with purchases, where you have approximately a month to pay back the money without paying interest. Again, if the interest gets too much, you can offset it with a card that offers an intro 0% APR on balance transfers and purchases.
Also, there is a risk of increasing your credit utilization rate, which can hurt your credit score. As a result, you might have difficulties in obtaining a loan in the future with lenders who check your credit report.
Why Take A Cash Advance?
Even though taking a cash advance on your credit card is costly, it still might be useful in certain situations. For example, if you’re traveling abroad and haven’t notified your bank, you might end up without access to your required currency. You may not have access to cash if your bank suspects fraudulent activity and puts a hold on your bank accounts. If your credit card is still active, you could take out a cash advance.
Also, you can consider a cash advance when you need cash to pay for specific services that don’t accept credit cards. For example, when paying your rent or hiring a plumber, babysitter, etc. It is also possible for your federal student aid provider to provide a portion of your student loan as a cash advance to your student account if you need the money urgently to cover student costs.
Taking Out A Cash Advance Loan
Cash advance loans or payday loans are the fastest and easiest way to get cash in comparison to other types of loans. They can provide a helping hand when you desperately need one. Lenders allow you to borrow money without checking your credit history and credit score. Such terms can be great for people with bad credit. They can obtain a cash advance loan, where they would be declined a personal loan. Lenders will, however, require proof of your income.
Related Article: Things You Need to Know About Wire Transfers
Cash Advance Alternatives
When you need fast cash, it is wise to consider alternatives before using a cash advance from your credit card. The following options are not ideal, but they might cost less in comparison to a cash advance in the long run.
Dip Into Your Emergency Fund
Long-term financial goals include saving for unexpected financial situations and emergencies. In other words, it involves creating an emergency fund you will use instead of taking a cash advance. It is recommended to save six months’ worth of living expenses. Unfortunately, 28% of Americans have no savings for emergencies.
Ask Your Friends Or Family Members For A Loan
Borrowing money from friends and family might be awkward, but it might be your best option if you want to save on interest and fees. If you choose this option, consider crafting a written agreement, called a promissory note, with details regarding the amount, payment terms, interest, and more.
Take An Advance On Your Salary
You can ask your employer to give you an advance on your next paycheck. You pay back the money you have borrowed with your next paycheck without paying interest or fees.
Take Out A Personal Loan
Another alternative to a cash advance is taking out a personal loan. If this is your chosen method for gaining fast cash, you should aim to take out an unsecured loan. Doing so will provide you with a fixed payment plan and a fixed interest rate from the bank, credit union, or reputable online lender. Unlike car loans or mortgages, you can use these installment loans for any purpose. However, to qualify for such a loan, you need to have good to excellent credit.
Consider Overdrawing Your Checking Account
Instead of a cash advance, you could overdraw your checking account to get access to needed cash. You will have to pay an overdraft fee, but you won’t have to face interest. Keep in mind that, if you have signed up for overdraft protection, you won’t be able to overdraw your account.
Also, consider linking your credit card to your checking account. Some credit cards provide overdraws and don’t charge a fee if you pay it back before the due date. One such card is the Bank of America Premium Rewards Visa credit card.
Make Use Of Third-Party Billing.
Third-party billing is the process of applying any purchases you make to your phone bill. Doing this doesn’t eliminate debt but will allow you to make purchases without using your credit card, or using a cash advance.
You should only use a cash advance in extreme emergencies. If you take out a cash advance, make sure you create a payment plan to pay it back as soon as you can. When used occasionally, cash advances can be a beneficial financial tool. If you rely on them regularly and use them to pay bills or make ends meet, you should seek help or counseling for budgeting and handling your finances. If you find yourself building up too much debt, you should consider consolidating it with a 0% APR balance transfer card.