What Is a Cash Advance and How Does It Work? - art by Jonan Everett

Jonan Everett

What Is a Cash Advance and How Does It Work?

•  4 minute read

A cash advance is an expensive way to get the money you need quickly. If possible, find another option that won’t hurt your finances as much.

Chances are that you’ve been in your fair share of financial binds. It always seems as if financial emergencies happen right when you’re running low on cash. So what can you do if you need money, but don’t have access to any? Many people turn to cash advances. What is a cash advance, you ask?

There are two kinds: those from credit cards and those in the form of loans, which are basically payday loans. We’ll cover both types, share the bad and the ugly about both (there is no good), and discuss the ways you can get money in other, less expensive ways and avoid having to take out a cash advance.

 

What Is a Cash Advance on a Credit Card, and How Do You Get One?

A credit card cash advance is when you stick your credit card into an ATM, enter your PIN number, and withdraw cash. That cash is then charged against your card. If you think cash advances from credit cards would be expensive because carrying a regular balance on your credit card is expensive, you’re right.

When you take out the cash advance, the credit card company will probably charge you a fee. While some credit cards charge a flat fee — say, $5 — others charge a percentage of the cash advance — say, five percent. Sometimes, the charge is either a flat fee or percentage, such as $5 or five percent — whichever is greater. On top of credit card fees, the ATM owner may charge you a few bucks as an ATM transaction fee, too.

Then the fun begins. While many credit cards offer a grace period on purchases before they start incurring interest, they don’t on cash advances. Instead, you’ll start paying a sky-high interest rate — often 20 percent or more — from the day you take the cash advance until you pay it off.

Another way credit cards give you cash advances is through convenience checks. If you use them, you’ve mostly likely taken a cash advance and will have to deal with the fees and interest outlined above. And if you want to know how much a cash advance will cost you, check out the terms and conditions that came with your credit card. If you’ve lost that information, call the number on the back of your card and a customer service representative should be able to tell you everything you need to know.

 

What Is a Cash Advance Loan, and How Do You Get One?

Cash advance loans are often a less harsh way of saying payday loan. You head to a lender (either in person or online) and take out a loan with the promise to pay it, plus a fee, back in a short period of time, usually two weeks.

Alternatively, many cash advance loans require you to hand over a personal check for the full payment amount. Then the lender either gives you cash or sends an electronic fund transfer to your bank account for the check amount, minus the lending fee. While it may not sound like a big deal to pay $10 to borrow $100 for two weeks, it’s actually is.

On the surface, it seems as if you’re paying 10 percent in interest to borrow the $100, but you’re actually paying a much higher rate.

Since the loan is for only two weeks and the interest is calculated on a yearly basis, you’re actually being charged an annual percentage rate of about 261 percent. That’s insane!

Fortunately, the Truth in Lending Act, a federal law, requires lenders to disclose the total cost of a cash advance loan. Both the finance charge — the dollar amount you’ll pay — and the annual percentage rate must be disclosed in writing before you sign for the loan.

 

Further Reading: Learn about alternatives to payday loans.

 

Ways to Avoid Cash Advances

As you can tell, cash advances are expensive. Thankfully, there are cheaper ways to find money if you’re in a financial pinch. If you have a day or two to pull the cash together, take a look around your home and see what you no longer use but can sell for a few bucks. You’ll be surprised at how much money you can make selling stuff on Facebook Marketplace or Craigslist. And you can usually unload it quickly if you price it right.

You can also browse the same sites to find ways to earn some extra cash. People often post small jobs that they need someone to take care of quickly. In many cases, they’re willing to pay somebody to do the tasks.

While I prefer to avoid debt at all costs, there are better types of debt than credit card cash advances and cash advance loans. For example, you can apply for a personal loan through a company like OppLoans. Other options include peer-to-peer loans and collateral loans such as a home equity line of credit. If you’re certain you’ll pay the loan back, you may even consider asking friends or family for a sum of money, although I generally recommend against it. If you end up not repaying the loan, you could permanently damage a valued personal relationship.

Ultimately, it’s up to you whether you take out a cash advance or cash advance loan. If you do, make sure you pay it off as quickly as possible to stop the financial bleeding.

Featured image art by Jonan Everett.