A cash advance loan, also referred to as a payday loan, is a short-term loan that borrowers use to pay for emergency expenses. The loan amount for cash advances is typically repaid by the customer’s next payday.
Although cash advances typically feature higher interest rates than regular loans, they remain attractive to borrowers because they have fast approval and quick funding.
Online cash advances typically allow you to borrow up to $5,000 in most states. The application process is easy, allowing you to get the money you need as quickly as possible.
What Is a Cash Advance Loan?
A cash advance loan, also known as a credit card cash advance, allows a customer to borrow money against their credit card. The same process works when you use your debit card to take out money. What you’re doing is getting a cash advance.
Here’s the difference. Debit card withdrawals are immediate. You get the cash directly and instantaneously from your bank account. A credit card cash advance requires borrowing money from a credit card company and paying back the funds later.
Lenders offer several types of cash advance loans. While the offers vary slightly between them, cash advances tend to have several similarities, such as high interest rates and hefty transaction fees.
So, why do cash advances have a high APR? Two reasons: convenience and security. Cash advances allow you to get a loan almost anytime, anywhere. You don’t have to worry about waiting in line or filling out reams of paperwork. Instead, you can go to your local ATM and get much-needed cash for a single transaction fee.
Second, cash advance loans don’t require collateral like credit card companies, banks, and other lenders, who can claim the asset if you don’t pay back the balance. The high APR helps these companies moderate their risk of lending money to high-risk cardholders. The higher the APR, the more lenders can mitigate the chances of borrowers not repaying them.
Types of Cash Advances
Credit Card Cash Advances
You have three primary options to get a cash advance loan. Credit card cash advances rank as one of the most popular choices because they have easy access and speed. You can use your credit card to withdraw cash from an ATM or bank in moments for a fee.
Unlike a traditional ATM withdrawal, you’re borrowing money from the credit card issuer. The lender gives you the money with interest and requires you to pay back the loan within a few days or weeks. A credit card cash advance usually has a $2 to $8 transaction fee and a $10 minimum purchase requirement.
Note that a credit card company may send the cash through the mail. The credit card issuer will send checks, also known as convenience checks, for the desired amount within a day. The borrower has to deposit the funds in their account. Convenience checks come with identical APRs and transaction rates as other credit card cash advances.
Merchant Cash Advances
A merchant cash advance works a lot like a credit card cash advance. It allows business owners an alternative way of receiving money when they’re short on cash. A merchant cash advance provider offers the business owner a loan based on their weekly or monthly business sales.
A merchant cash advance allows a business owner to circumvent the traditional visit to the bank. Instead, they can take advantage of the convenience and speed of the alternative cash advance. Payday loan amounts range from $2,500 to $500,000 and have repayment terms from three to 36 months.
If your business needs cash fast, merchant cash advances can deliver the necessary funds in no time. They do not require strong credit scores and provide business owners flexibility in how they use the funds. Neither does this form of cash advance loan require collateral to secure the transaction.
Even the best merchant cash advances have unfavorable fees and interest rates for the borrower. The APR ranges from 70% to 200%, and even if you repay the balance, it won’t help your credit score. A cash advance also requires the business to accept credit cards to receive the money and may hurt the borrower’s daily cash flow.
The Consumer Financial Protection Bureau doesn’t have a set definition for payday loans, also known as paycheck advances. However, you can expect some standard features, regardless of what state or lender you use. Most of them have short repayment terms, high fees, and a $500 maximum balance.
The terms and conditions that surround paycheck advance vary due to state regulations. For example, some states allow companies to charge APR as high as 780%. Other states have banned payday loans, including:
- New Jersey
- New Mexico
- New York
- North Carolina
- West Virginia
States that permit payday loans limit interest rates to 5% to 30%. Some cash advances have exemptions, allowing the lender to charge a higher interest rate. While the federal Truth in Lending Act requires payday lenders to tell borrowers about the transaction fees, many people overlook them because they need cash urgently.
The Consumer Financial Protection Bureau loosened regulations surrounding paycheck advances in February 2019. The rule revoked the mandatory underwriting provisions and delayed implementation. Under the Biden administration, experts believe that this type of cash advance will garner stricter rules.
Requirements for an Online Cash Advance
The requirements for an online cash advance depend on the lender. Some places require a savings account, while others have specific employment criteria. Standard requirements on cash advance applications include:
- A phone number
- An email address
- A checking or savings account
- A mailing address
- Proof of income
- A Social Security number
- A government-issued ID
Before you receive your cash advance, the payday loan lender will have you fill out a short application. It will cover some of the criteria mentioned above, such as your sources of recurring income and contact information. Once you apply, you should receive an approval or rejection email within 24 hours.
Applicants must be at least 18 when they apply for the cash advance. That’s the age that federal law considers people adults. Some states like Alabama have higher minimum ages.
If you prefer face-to-face banking services, you can also get a cash advance in person. In that case, most of the requirements for the cash advance loan remain the same. The key difference is that you’ll need a post-dated check for repayment rather than providing your bank account information.
Can Cash Advances Hurt Your Credit Score?
A cash advance loan can hurt your credit score in two ways. First, the line of credit may increase your credit utilization rate above 30%. This figure indicates how much revolving credit you have from the bank and credit card issuers divided by your total revolving credit.
Let’s say you have $2,500 in credit card purchases and a credit line of $10,000. Your credit utilization rate would be 25%. As a rule of thumb, experts recommend a credit utilization rate below 30%.
Now, let’s say your emergency fund dries up and you need a $1,000 credit card cash advance. Your outstanding obligations add up to $3,500 but your credit line remains the same. Therefore, your credit utilization rate is 35%.
According to Experian, your credit utilization rate makes up 30% of your FICO score. The lower your outstanding credit, the better. Exceeding the 30% threshold tells creditors that you’re reliant on non-cash funds, such as loans and credit card purchases.
Second, a cash advance may prevent you from paying back other outstanding obligations. For example, you might take out a $1,000 cash advance with a high APR. Once the terms expire, you owe the lender $1,300. That doesn’t include the additional fee or flat rate that lenders charge.
So, why does the $1,300 balance matter? In this example, you’re paying several hundred dollars just to borrow $1,000. More importantly, payment history makes up a significant percentage of your credit score.
According to Experian, payment history accounts for 35% of your credit score, making it the most heavily weighted factor. If you make your payments on time, the credit bureau will give your FICO score a slight boost. However, if you miss a payment, you’ll see a disproportionate drop in your FICO score.
When Should Cash Advances Be Used?
Consider a cash advance as a last resort. While it may sound tempting to borrow money on credit, the terms and conditions put you in an unfavorable situation. You have to agree to high transaction fees and interest charges just to get the money.
Keep in mind that cash advances lack grace periods. You don’t have the luxury of a full billing cycle to pay off the amount that you owe. The interest begins accruing as soon as the money hits your bank account.
Most people who get a cash advance need cash urgently. Perhaps their next paycheck won’t arrive for another week and they have medical bills due today. Cash advance providers make it easy to secure funds with minimal time and effort.
While cash advances have their benefits, cardholders should be careful what they wish for when borrowing. Providers make borrowing easy so that they can earn a backend profit. The steep transaction fees and interest rates may even put customers in a worse financial situation than when they started.
Can You Get a Payday Loan with Bad Credit?
Yes, you can secure a cash advance with less-than-perfect credit. A cash advance may be the only viable option for people with poor credit. That’s, in part, because providers use a range of criteria to determine a customer’s eligibility instead of relying on a credit score.
Prepare to pay a higher-than-average interest rate if you have a low credit score. Lenders use high fees as a way of offsetting their risk. High interest rates ensure that companies can remain profitable if customers don’t repay their cash advance.
Alternatives to Cash Advances
A personal loan offers a more advantageous way to borrow than a cash advance, especially if you need to make an expensive purchase or consolidate high-interest debts. You can borrow a specific amount of cash from a bank or credit union without collateral. This form of funding also has relatively low interest rates (5.99% to 18.85%) and longer terms (six months to seven years), making it easier to repay your obligation.
Auto Title Loans
Auto title loans involve using your car or vehicle as collateral to secure funds. You will receive cash in a lump sum and repay it to the provider with interest. The amount you borrow will depend on the car’s value, the APR, and the terms. If you don’t repay the amount with interest, the provider can claim your vehicle as compensation for their services.
Instead of going to a bank or ATM for funds, you can turn to peer-to-peer lenders, also known as P2P lenders and crowd lenders. Online lending platforms such as Lending Tree and Prosper let individuals borrow from other people who have pooled their funds together. The borrower benefits from relatively lower interest rates while the lender earns a higher return than traditional investment and savings products.
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