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Cash advances offer quick access to funds without the time-consuming processes associated with traditional loans, such as lengthy applications or repayment terms. It is a broad term that covers several financial products, including credit card cash advances, merchant cash advances, cash advance apps, and short-term consumer loans such as payday loans.
This guide explains what cash advances are, how they work, what to consider before borrowing, how to repay them, and how they can affect your credit score.
What Is a Cash Advance?
A cash advance is a financial product that, as the name suggests, provides access to funds before your next payday.
Credit card cash advances allow you to withdraw money against your available credit line through ATMs, bank branches, online transfers, or convenience checks.
In Consumer lending, the term “cash advance” refers to loans issued by small-dollar loan specialized lenders online or locally. These short-term loans provide small amounts for brief repayment periods and may include finance fees, interest charges, or both.
Cash advances also refer to funding available to businesses that offer merchant cash advances. There are cash advance apps that offer access to earned wages or short-term funds that provide funding.
As these products vary widely, identify which type of cash advance best meets your needs before committing to one.
How Does Cash Advance Work?
The specific process will vary based on the type of cash advance.
With a credit card cash advance, you borrow against your card’s cash advance limit rather than its purchase limit. Your card issuer may allow you to access cash through an ATM using a PIN or at a participating bank branch. You may also transfer funds through online banking or use a convenience check. Your cash advance limit may also be lower than your overall credit limit.
Example: A credit card could have a $5,000 purchase limit but only allow $1,000 in cash advances. If you withdraw $500, it would be added to your card balance, with fees and interest accruing immediately.
Other cash advance products work differently: payday loans typically provide a short-term amount that must be repaid according to the loan agreement. Merchant cash advances provide business funding and typically base repayment on future sales. Cash advance apps allow workers to access wages earned but not yet collected.
Types of Cash Advances
Merchant Cash Advances
These are designed specifically for businesses. Instead of borrowing against personal credit lines, businesses receive an upfront amount from a financing company and agree to provide it with a portion of future sales or receivables as collateral for repayment.
Repayment structures vary. Some agreements use a percentage of daily or weekly card sales as repayment, while others create fixed payments based on projected revenue.
Merchant cash advances differ significantly from conventional business loans in that their repayment can be tied directly to sales revenue.
Cash Advance Apps
Cash advance apps provide fast access to money, enabling workers to access some of their wages before their regular payday. As these products may operate differently from traditional loans, be sure to consider how the provider calculates available funds.
Consumer Financial Protection Bureau research indicates that fees can vary widely among earned wage products. The research also found that workers may use these products multiple times, making cumulative costs important rather than focusing only on the fee charged for each advance.
Some paycheck advance products may also fall under federal consumer credit laws, depending on how they operate.
Payday Loans vs. Payday Alternative Loans
In consumer lending, the term “cash advance” is often used to refer to payday loans issued by specialty lenders online or locally.
Payday loans are short-term loans repaid after your next paycheck or other expected source of income, typically with an associated finance charge based on borrowed funds.
Payday Alternative Loans (PALs) differ significantly. Federal credit unions can offer them to eligible members under NCUA rules. PALs I typically range from $200 to $1,000, with repayment terms of one to six months. PALs II provides another small-dollar lending option with different requirements and features, including restrictions on rollovers and requirements for full amortization under applicable rules.
A payday loan from a specialized lender and a payday alternative loan from a federal credit union are separate products with distinct eligibility requirements, costs, terms and regulatory structures.
What to Know Before Getting a Cash Advance
Before taking out a cash advance, carefully assess exactly how much you are willing to borrow and when to repay. Remember that the sum you receive may not necessarily reflect what will need to be repaid later.
Check your APR, cash advance fee and available limit before taking out a credit card cash advance. Keep in mind that they often come with higher APRs than regular purchases and begin accruing interest immediately.
It may address immediate needs but create another problem if its repayment takes up too much of your salary or credit line, especially when you do not have an emergency fund to cover unexpected expenses.
How to Repay a Cash Advance?
Your repayment method depends on which cash advance you receive.
A credit card cash advance is added to your card balance and must be repaid according to your card’s terms. Paying more than the minimum can help you pay off the balance faster and reduce the interest you pay. Since interest often starts right away, paying down the balance as soon as possible can help reduce the total interest cost.
Payday loans typically have a specific repayment agreement set by lenders. You may repay such a loan through electronic debit from your bank account or another authorized payment method.
Repayment for merchant cash advances generally follows either a sales-based or fixed-payment structure agreed upon in the contract. Thus, decreasing available business cash flow and necessitating planning of operating expenses to account for this expense.
Repay your current advance before taking another one to cover its cost. Repeated borrowing can increase your costs and make the original cash shortage harder to resolve.
Do Cash Advances Affect Your Credit Score?
Cash advances do not automatically reduce your credit score simply because you take one out.
Credit card cash advances typically do not appear as separate entries on your credit report. However, the advance increases your credit card balance. If the higher balance significantly increases your credit utilization, it can affect your credit score. Missing payments can also hurt your credit history.
Other types may have different repercussions; whether or not a payday loan or other short-term product is reported to credit bureaus depends on both the provider and the product. Even when an advance isn’t reported directly, failure to repay debts could still create credit card debt or other financial issues that affect your credit.
Pros and Cons of Cash Advances
Cash advances provide quick access to money when an urgent expense arises and other options are limited. A credit card cash advance could provide immediate cash when merchants do not accept cards, while another type may help bridge short-term gaps between income sources.
Payday loans and cash advances may not always be the right solution, but cash advances may be suitable if an emergency arises related to money within a short timeframe.
The key benefit of cash advances lies in their speed. Depending on your product choice, funds could be available immediately or within a very short timeframe. Some do not require collateral, while credit card cash advances don’t necessitate separate credit applications because they use existing lines of credit instead.
The primary downside lies in the borrowing cost. Credit card cash advances often include an upfront fee, a higher APR than regular purchases and no grace period. Payday loans often carry high fees, merchant cash advances can involve significant financing charges.
Conclusion
Cash advances are not one-stop financial products; rather, this term refers to various financial products with short-term funding needs such as credit card cash advances, merchant cash advances, cash advance apps and payday loans – each product may differ in eligibility requirements, costs and repayment structure – and their potential effects on your finances.
