Cash advances have been used to help countless Americans out of tight financial spots. However, they have also received a fair amount of criticism over the years for fostering situations in which people become dependent on cash advances and are unable to recover and get back on their feet financially.
Here we explore the good, the bad and the alternatives to cash advances so, as a financial consumer, you can make informed economic decisions when life’s little emergencies come your way.
What is a Cash Advance?
The term “cash advance” may mean different things in certain situations. There are essentially three types of cash advances. They include:
- Payday loan cash advances: The payday loan operates much like the name implies. In addition to featuring lofty interest rates, these loans also often charge additional fees, so know the facts before you borrow. The funds are then automatically deducted from your account (including interest and fees) when your designated payday arrives.
- Credit card cash advances: Credit card cash advances allow you to take your credit card to an ATM and withdraw cash from the card. Most credit card companies require higher interest rates for these transactions than normal, and they may be excluded from any discounts or programs your credit card company offers.
- Merchant cash advances: Merchant cash advances are solely used for businesses that need quick cash but have less-than-ideal credit. It offers businesses fast access to the cash they need and has less stringent credit requirements and time constraints than most traditional lending methods.
Cash Advance Benefits
Perhaps the most important benefit for all cash advance scenarios is that you get fast access to cash when you need it. You do not have to wait for banks to open, or for long approval processes. You get an immediate response and immediate cash (or money deposited into your account as the case may be).
The other benefit is that credit is not a primary determining approval factor for a cash advance. While you are limited to the funds available on your credit card for that particular cash advance, you do not need to apply for new credit to take advantage of it.
Finally, you do not have to do much paperwork when applying for cash advances either. It does not ding your credit report, and no collateral is required to secure the loan. For many people, it is an easy and quick solution for emergencies that require fast cash to fix.
That does not mean it is all sunshine and roses though. There are a few potential downsides to consider before you pull the trigger on a cash advance.
Issues with Cash Advances
Before you dive in and whip out your credit card or apply for a payday loan online, it is a good idea to consider the potential pitfalls of this type of loan, especially since some of them are pretty substantial.
Interest and fees are one drawback to consider. There is a price to pay for fast access to cash, and it is sometimes much more significant than you expect. Investopedia warns that some payday loan providers charge fees of up to 15 percent of the total borrowed amount plus interest which can be as high as 100 percent or more of the borrowed amount.
The other downside is that these are incredibly short-term loans. That means they must be repaid quickly, often within two weeks without paying substantial penalties or rolling the loan over and paying even larger interest rates.
If you use your credit card for the loan, there are still problems to consider as the interest rate is often higher than on your other purchases, meaning your new debt can linger and grow for months, years, or even decades if you do not promptly pay back the advance.
Alternatives to Cash Advances
Fortunately, there are options to cash advances that you can also consider. They include borrowing money from friends and family. That is not always the most attractive option but one that is better in the long-term. Personal loans are also options to consider. Some lenders offer prompt answers and far more attractive interest rates than payday lenders. Alternately, you could tap into your home’s equity or cash out retirement accounts.
Understanding these realities of cash advances helps you make better-informed choices in your financial journey.