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Home What Is Cash Advance APR And How It Works

What Is Cash Advance APR And How It Works

While nobody likes finding themselves in such a situation, the unexpected nature of our daily lives may have us borrowing money at some point. Most of us dislike the idea of borrowing money; some people have come to appreciate the value of cash advance loans. 

However, for all their worth, cash advance loans have some notable drawbacks that might implicate your financial situation further, and high annual percentage rates (APR) are chief among them. 

In this guide, we’ll talk about cash advance APRs, what they are, how they work, the costs associated with cash advances, and whether or not they damage your credit score. This guide aims to provide you with insightful knowledge that will help you better manage your cash advance borrowing so that you don’t incur additional debt or damage your financial score.

calculating cash advance APR

What is Cash Advance APR?

At their core, APRs are interest that you pay back on your cash advance, but before we dive into a more comprehensive explanation, allow us to offer a quick reminder on cash advances. 

Cash advances are short-term loans that you borrow from your credit card provider by borrowing against your credit card’s available credit limit, though some providers offer separate cash advance limits. These loans often come with cash advance fees, high interest rates, and no grace period, which credit card cash advances into a rather expensive solution for your financial emergencies. 

Users typically obtain cash advances from ATMs (thus incurring ATM fees), from bank personnel, convenience checks, or from online lenders. The latter is better known as payday loans, which have become synonymous with cash advances despite being a different financial product, and usually come with exorbitant APRs. 

Annual percentage rates for cash advances refer to the interest rate applied by the money borrower or the credit card company through a cash advance transaction on a credit card. However, they’re not simple interest charges, as they also encompass other fees associated with the credit card cash advance loan. 

In most cases, the APR for cash advance loans ranges from 25% to 30%, which is slightly higher than what you’d expect from the average interest rate associated with credit card purchases; these are separate rates. 

Payday loans, which admittedly aren’t a part of this discussion, usually come with exorbitant APRs that can go up to 400% or even higher. Due to their exorbitantly high interest rates, the relatively small amount of cash they provide, and exceptionally short repayment terms, payday loans are often considered predatory loans. This does not apply to cash advances obtained from your credit card issuer. 

How Does a Cash Advance APR Work?

The cash advance APR works by applying a specific annual percentage rate to any cash you borrowed as a personal loan (not a purchase) through your credit card’s cash advance feature. Borrowing money through the cash advance feature immediately begins with interest accumulation. 

It’s worth noting that, unlike regular purchases, which have a grace period during which no interest is charged if you pay your debt balance in full, cash advances start accruing interest on the cash advance amount you borrowed. 

This means that cash advances have no grace periods, and interest starts to accumulate the moment you take out the cash. It’s also worth noting that cash advances typically feature higher interest rates than purchases.

This brings up the question of how the APR is applied to short-term personal loans if it’s an annual percentage rate. Well, the initial rate is calculated based on the interest rate and associated costs of a cash advance, such as origination or ATM fees. The annual rate is then divided by 365 days to determine the daily periodic rate, which is then applied to the cash advance balance each day.

Another important factor is the transaction fee, which is usually a fixed amount or a percentage of the loan amount that typically ranges from 3% to 5%. For the sake of this discussion, we’ll assume that the transaction fee is 5% and a 25% APR.

If you decide to take a cash advance of $1,000, the transaction fee adds another $50 to your total debt, which now totals $1,050. When we apply a 25% APR to the loan on a 30-day repayment period, the total amount grows to $1,071.87 for you to repay. 

Cash advance loans don’t have a strict repayment period, and assuming you chose to pay back your loan in equal monthly installments, your monthly payment would be approximately $110 per month, with a grand total of $1,312.5 of debt for you to repay.

Costs Associated With a Cash Advance

As stated above, cash advances come with additional costs that are added to the amount borrowed, most of which account for the APR. However, other fees might outweigh the perceived benefits and conveniences of cash advances, so please read through for a more thorough explanation. Understanding these costs can help you make a more informed decision. 

Cash Advance Fees

The previously mentioned cash advance fees are typically charged by the credit card issuer each time you borrow money via cash advance. It’s often charged as a percentage of the amount advanced, ranging from 3% to 5%. Relying on the previous example, if you withdraw $1,000 with a 5% fee, you’ll pay an additional $50 on those $1,000 as a fee. 

This is important to know, as the fees are added to your advance amount each time you withdraw, but before the APR is calculated. 

Higher Interest Rates

We already discussed that interest rates for cash advances are higher than those for purchases or balance transfers. The higher rates, which range from 25% to 30% (depending on the credit card issuer) start applying immediately, from the moment you take the advance, without any grace period. 

The interest is usually calculated daily starting from the date you withdrew the advance, which means that the longer you take to pay back, the more interest you’ll accrue. 

ATM Fees

In addition to the fees charged by your credit card provider, you’re likely to incur additional fees by obtaining your cash advance from an ATM. This can be a flat fee or a percentage of the amount you withdrew, depending on the ATM’s bank’s various policies. 

No Reward Points

Regular credit card purchases often come with the aforementioned grace period, but also several other rewards, like points, miles, or even cashback. Cash advances don’t come with any of these rewards, which means you’re missing out on all the potential benefits that your credit card offers on other transactions. 

Does Cash Advance Hurt Your Credit?

A good thing about cash advances is that they’re treated as ordinary credit card transactions, meaning that they don’t hurt your credit scores as long as they’re repaid. However, that doesn’t mean that the frequent use of cash advances won’t have adverse effects on your credit score. 

When you take out a cash advance, the balance on your credit card statement report will increase by the advance amount, plus the accumulated fees and interest. Any balance on the report affects the credit card utilization date, which is the balance expressed as a percentage of the card’s borrowing limit. 

Individuals with exceptional FICO scores usually keep their credit utilization rate in the single digits, but your credit score is generally safe as long as your utilization is below 30% of your borrowing limit; your FICO score won’t be affected in any way. 

However, once that number goes above 30%, a cash advance has the potential to damage your credit. Those damages can also be quite severe since the credit utilization rate makes up approximately 30% of your credit score, and cash advances affect that utilization more extremely compared to regular credit card purchases and transactions. 

This happens because of the higher APRs that are typically associated with cash advancements., resulting in a higher credit card balance. The lack of a grace period also plays a significant role in this; credit card purchases that are repaid in full upon receipt of the first statement typically incur no interest charge. However, that’s not the case with cash advances. 

loan agreement

Viable Alternatives

If you need cash, several alternatives could be easier on your finances and your credit utilization compared to cash advances. These include: 

  • Private loans: Instead of resorting to financial institutions and private lenders, try borrowing from your friends or family. They’re more likely to borrow money free of interest (or on a lower interest), making them more affordable compared to cash advances. 
  • Personal loans: Personal loans are an incredibly wide category of loans that can be either secured or unsecured, and some of them don’t even imply credit checks. It’s worth noting that your FICO score does play a crucial role in both types of personal loans because the borrowers typically determine your interest rates and repayment terms based on your credit history; the better the credit, the more convenient the loan. 

Summary

Cash advance APRs are annual interest rates associated with your cash advance, but applied daily. If you’re interested in securing a cash advance, you can fill in the online form now, and we’ll do our best to meet your needs. 

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