What is a 'Cash
Advance'?
Cash
advances are designed to help people cover short-term cash needs until their
next payday. Also referred to as payday loans, cash advances can be a practical
and secure way to tide you over when unexpected expenses crop up. If you have
expenses related to an auto accident, emergency medical expenses, or other
unexpected bills, a cash advance could help you bridge the gap.
A
cash advance is a short-term loan from a bank or alternative lender. The term
also refers to a service provided by many credit card issuers allowing
cardholders to withdraw a certain amount of cash. Cash advances generally
feature steep interest rates and/or fees, but they are attractive to borrowers
because they also feature fast approval and quick funding.
How it works...
Complete a short
application, sign an agreement, and write a check for the loan amount plus fee.
Receive cash on the spot and we will hold your check until your next payday
when you’re due to repay. one-time fee for its service.
Types of Cash Advances
Credit Card Cash
Advances
The
most popular type of cash advance is borrowing on a line of credit through a
credit card. The money can be withdrawn at an ATM or, depending on the credit
card company, from a check that is deposited or cashed at a bank. Credit card
cash advances typically carry a high interest rate, even higher than the rate
on regular purchases: you’ll pay an average of 23.53% – about 8.54% higher than
the average APR for purchases. What's more, the interest begins to accrue
immediately; there is no grace period.
They
usually include a fee as well, either a flat rate or percentage of the advanced
amount. Additionally, if you use an ATM to access the cash, you often are
charged a small usage fee.
In
most cases, credit card cash advances do not quality for no- or low-interest
rate introductory offers. On the plus side, they are quick and easy to obtain.
Merchant Cash Advances
Merchant
cash advances refer to loans received by companies or merchants from banks or
alternative lenders. Typically, businesses with less-than-perfect credit use
cash advances to finance their activities, and in some cases, these advances
are paid for with future credit card receipts or with a portion of the funds
the merchant receives from sales in his online account. Rather than using a
business' credit score, alternative lenders often survey its creditworthiness
by looking at multiple data points, including how much money the merchant
receives through online accounts such as PayPal.
Payday Loans
In
consumer lending, the phrase "cash advance" can also refer to payday
loans. Issued by special payday lenders, they can range anywhere from $50 to
$1,000, but they come with fees (around $15 per $100 borrowed) and interest
rates exceeding 100%. Rather than taking into account the borrower's credit
score, the lender determines the amount of the loan based on local state
regulations and the size of the applicant's paycheck. If the loan is approved,
the lender hands the borrower cash; if the transaction takes place online, the
lender makes an electronic deposit to the borrower's checking or savings
account.
The
loans are extremely short-term – required to be paid back on the borrower's
next payday, unless he or she wishes to extend the loan, and in that case
additional interest is charged. Unfortunately, many do: 80% of all payday loans
are rolled over within 30 days of the previous loan, according to a study by
the Consumer Financial Protection Bureau (CFPB).
Some
employers offer payday loans or advances on paychecks as a service to their
employees. Terms vary, but often no fees or interest are charged.
Direct Deposit
Advances
Another
form of cash advance is a direct deposit advance. With this lending tool, banks
advance an amount based on a customer's direct deposits. Then, when the deposit
is actually made, the bank recoups the loan and the associated fees. In most
cases, the repayment for the cash advance is taken out of the account before
any other checks, after receiving numerous complaints about the fees related to
their cash advances, many major banks discontinued this practice.
Do Cash Advances (Your Credit Score)
Taking
out a cash advance has no direct impact on your credit or credit score, but it
can affect it indirectly in various ways.
As
mentioned earlier, the cash advance usually has a high interest rate. If this
affects your ability to pay the monthly charges promptly, that could affect
your credit score. And if the cash advance puts you over the card's credit
limit, that can lower your credit score. Even after the balance is paid down,
your credit report will show the highest balance reported, and other potential
lenders will see that you were over the limit at one point, which could hurt
your ability to get new credit.
Cash Advance Pros and
Cons
A
credit card cash advance could be a reasonable option for someone who has an
emergency need for money and limited resources for getting it – especially when
that person has a clear and reasonable plan for paying back the money in a
short amount of time. It is, for example, a better option than a payday loan or
a car title loan, due to the exorbitant triple-digit interest rates those loans
typically carry and the greater payoff flexibility that comes with credit card
debt.