How Does Cash Advance Work and Should You Get One?

We’ve all faced financial emergencies that require quick access to cash. Cash advances can be a tempting solution, but how does cash advance work? They come with various costs and risks. In this blog post, we’ll explore the different types of cash advances, their costs, and potential risks. We’ll also discuss alternatives to cash advances and provide some helpful tips for managing them.

Short Summary

• Cash advances are costly and carry high risks. Understand features, fees & costs before utilizing.
• Alternative options such as personal loans or borrowing from friends/family may be cost effective.
• Manage cash advances effectively by creating a repayment plan, paying off the balance quickly & exploring alternatives.

Understanding Cash Advances

A cash advance is a short-term loan that can be accessed through your credit card, a merchant cash advance, or a payday loan. While these financial tools can provide quick access to funds, they often come with high costs and risks, making it essential to understand how cash advances work before using them.

Let’s dive deeper into each of these types of cash advances to better understand how they work and their unique features.

Credit Card Cash Advances

Credit card cash advances allow you to withdraw a certain percentage of your credit limit, subject to high interest rates and fees. This percentage is known as your cash advance limit. To get a credit card cash advance, you can either withdraw cash at an ATM, request a convenience check from your card issuer, or visit a financial institution in person. The requested amount will be deducted from your available credit balance. Additionally, the cash advance fee will also be taken into account. Keep in mind that cash advance interest rates typically range from 17.99% to 29.99% APR and start accruing the same day the transaction is made, with no grace period for payments.

Up-front fees for credit card cash advances are usually either a flat fee or a percentage of the cash advance, whichever is greater, commonly ranging from $5 to $12 or 3% to 8%. Additionally, you might incur ATM fees if you use an ATM from a different bank, as well as a transaction fee if you withdraw cash in another currency. These fees and high interest rates make credit card cash advances an expensive option for borrowing money.

Merchant Cash Advances

Small business owners are able to access funds through merchant cash advances. This fund can be accessed by analysing past sales performance and predicting future sales. Repayment for a merchant cash advance is calculated based on a factor of daily sales, typically ranging from 1.2 to 1.5.

While this type of cash advance can offer quick access to funds, it may result in reduced business cash flow and payments that increase in response to higher sales, further reducing cash flow.

Payday Loans

Payday loans are a relatively small amount of money borrowed for a short period of time. These types of loans are secured by a deferred presentment transaction. They are designed to provide fast cash until your next paycheck, but often come with extremely high interest rates, making them an unfavorable option compared to other alternatives. For example, a payday loan might have an interest rate of over 390%.

When you take out a payday loan, you are required to pay finance charges, typically $10 to $30 for every $100 borrowed. Due to their predatory nature and high costs, it is generally recommended to avoid payday loans and consider other options for accessing emergency funds.

Costs and Risks of Cash Advances

Cash advances, whether through credit card companies, merchant cash advances, or payday loans, come with various costs and risks. High interest rates, fees, and potential negative impact on your credit scores are just a few of the challenges associated with taking out a cash advance from a credit card issuer.

In the following sections, we’ll delve deeper into these costs and risks, as well as explore some alternatives to help minimize them.

High Interest Rates

Cash advances have higher interest rates than regular credit card purchases, with no grace period for payments. This means that interest starts accruing the same day the transaction is made, and it will continue to compound until the balance is paid in full. Cash advance interest rates are usually between 17.99% and 29.99% cash advance APR. This has already been mentioned earlier.

These high interest rates make cash advances a costly option for borrowing money. If you’re considering a cash advance, it’s important to weigh the costs against your need for fast cash and explore other options if possible.

Fees and Charges

In addition to high interest rates, cash advances also come with a variety of fees and charges. As we’ve discussed, credit card cash advances have up-front cash advance fees, which can be either a flat fee or a percentage of the cash advance amount. You may also incur ATM fees if you use a different bank’s ATM, foreign transaction fees if you withdraw cash in another currency, overdraft fees if you exceed your credit limit, and returned-check fees if a check is returned due to insufficient funds.

These fees and charges can quickly add up, making cash advances an expensive option for accessing emergency funds. Before taking out a cash advance, it’s important to consider these costs and explore other options if available.

Impact on Credit Score

Taking a cash advance can also have an indirect effect on your credit scores by increasing your outstanding balance and credit utilization ratio. Credit utilization is the percentage of your available credit that you’re using, and it’s an important factor in determining your credit scores. High credit utilization can have a negative impact on your credit scores, making it more difficult to obtain future loans or credit cards at favorable interest rates. This is especially true when you’re using a significant portion of your credit line, such as with a cash advance.

To minimize the potential impact of a cash advance on your credit scores, it’s important to pay off the balance as quickly as possible. This will help reduce your credit utilization and demonstrate responsible credit management, which can help improve your credit scores over time.

How to Get a Cash Advance Loan with US Cash Advance

Obtaining a cash advance loan through US Cash Advance is a relatively straightforward process. The platform serves as a facilitator, connecting potential borrowers with suitable lenders from its network. To initiate the process, individuals are required to fill out an inquiry form available on the US Cash Advance website. It’s important to provide accurate and complete information to improve the chances finding the right lender.

Once the form is submitted, US Cash Advance shares it with potential lenders within its network. If a lender decides to offer a loan, they will provide the borrower with a loan agreement detailing the amount, interest rate, fees, and repayment terms of the loan. Borrowers should thoroughly review these details and ensure they understand and agree to the terms before accepting the loan. The funds are typically deposited directly into the borrower’s bank account once the loan agreement is signed and accepted. Throughout the loan period, borrowers are expected to make timely repayments as per the agreement to avoid additional charges and potential impacts on their credit score.

Alternatives to Cash Advances

If you’re considering a cash advance, it’s important to explore other options that may be more cost-effective and less risky. Some alternatives to cash advances include personal loans, borrowing from friends or family, and using mobile banking apps that offer faster direct deposits and overdraft protection.

In the following sections, we’ll discuss these alternatives in more detail.

Personal Loans

Personal loans from banks or credit unions may offer lower interest rates and more favorable terms than cash advances. These loans typically feature a fixed interest rate, term, and payments, which can make them easier to manage and budget for. Additionally, some personal loans may not incur any fees, making them a more cost-effective option for borrowing money.

The average APR for a 24-month personal loan was 11.48%, significantly lower than the average APR across all credit card accounts, which was 20.09%. Before taking out a cash advance, consider applying for a personal loan through your bank or credit union to potentially save on interest and fees.

Borrowing from Friends or Family

Borrow money from friends or family can be a less costly and more flexible loan option compared to cash advances. Loans done informally may not require a contract. Also, they could have a lower interest rate compared to what a bank would charge.

However, it’s important to consider the potential impact on your relationship with the person lending you the money. A breached loan agreement can create tension and strain the relationship, so be sure to discuss the terms and conditions openly and honestly before borrowing money from friends or family.

Title loans

Title loans are a type of secured loan where borrowers can use the title of their vehicle as collateral. To obtain a title loan, the borrower allows a lender to place a lien on their vehicle title, temporarily surrendering the hard copy of the vehicle title in exchange for a loan amount. When the loan is repaid, the lien is removed and the car title is returned to its owner. If the borrower defaults on their payments, however, the lender can repossess the vehicle and sell it to recover the unpaid debt. The amount you can borrow with a title loan generally depends on the value of the vehicle being used as collateral.

Title loans can be an alternative to cash advance loans, especially for those with poor credit. Cash advance loans, or payday loans, are short-term, high-interest loans that are generally required to be paid back on your next payday. While these loans can provide quick cash, they can also lead to a cycle of debt due to their high interest rates and fees. In contrast, title loans usually offer lower interest rates because they are secured by your vehicle, reducing the lender’s risk. However, this means that if you fail to repay a title loan, you risk losing your vehicle, which could significantly impact your life and financial situation. Therefore, both types of loans should be considered carefully and used only for short-term financial needs.

Tips for Managing Cash Advances

If you do decide to take out a cash advance, it’s important to manage it effectively in order to minimize costs and risks. This includes creating a repayment plan, paying off the balance as quickly as possible, and considering alternatives to cash advances.

In the next sections, we’ll provide some helpful tips for managing cash advances effectively.

Creating a Repayment Plan

Developing a plan to repay the cash advance as soon as possible is crucial to avoid accruing high interest. To create a repayment plan, calculate the total amount owed and the amount you can afford to pay each month. Then contact the lender to discuss available options and negotiate a plan with reduced interest rates or an extended repayment period if necessary.

A well-structured repayment plan can help you manage your debt and avoid accruing high interest charges. Be sure to make payments promptly and in full each month, keep a record of payments, and periodically review the plan to ensure it remains the most suitable option for your financial situation.

Paying Off the Balance

Paying off the cash advance balance immediately or as quickly as possible is essential to minimize interest charges and potential impact on your credit scores. The sooner you pay off the balance, the less interest you’ll accrue, and the more money you’ll save in the long run.

To pay off the balance, consider making additional payments toward the principal whenever possible, and avoid using the cash advance for nonessential expenses. By paying off the balance quickly, you’ll reduce your credit utilization and demonstrate responsible credit management, which can help improve your credit scores over time.

Summary

In conclusion, cash advances can provide quick access to funds in times of financial emergencies, but they come with various costs and risks. Understanding the different types of cash advances, their associated costs, and potential risks is crucial in making informed financial decisions. Explore alternatives such as personal loans, borrowing from friends or family, and using mobile banking apps to minimize costs and risks. If you do decide to take out a cash advance, manage it effectively by creating a repayment plan and paying off the balance as quickly as possible. Remember, always consider all of your options and make the best financial decision for your unique situation.

Frequently Asked Questions