Introduction
Life can throw surprises, and expenses can crop up when we least expect it. This is where cash advances come in; they allow you to borrow money you can access very quickly, usually within 24 hours or less.
While cash advances should not be used regularly or to fund unnecessary purchases, they are important in providing fast cash in emergencies. According to creditcards.com the average cash advance APR is 24.08%, which gives an estimate of how cash advances can be expensive compared to normal credit card purchases.
This blog discusses everything you need to know about the best and worst options for cash advances, key factors to consider, and tips for borrowing responsibly.
Read more: 7 Quick ways to become Debt-Free before 40
What is a Cash Advance?
According to Investopedia, a cash advance is a short-term loan that provides fast access to cash which you repay over a relatively short time frame. Lenders, banks, credit card companies, and other financial services providers offer many cash advances. They can be termed as payday loans, check loans, installment loans, line of credit loans, credit card cash advances, and more.
The defining feature of a cash advance is quick access to money, typically by the next business day. Cash advance interest rates are usually much higher, and fees can dramatically increase the overall cost.
Why Access to Fast Cash is Important
Different options to access emergency funds can prevent financial struggles when unexpected expenses arise. For example, imagine your car suddenly breaking down, leaving you without transportation to work. Or a family member has an urgent medical issue that requires payment for treatment.
Even those with savings or available credit on a credit card can benefit from cash advances in these situations. Cash advances provide funds literally within 24 hours in most cases. This can help avoid late fees, service interruptions, and other issues when you need extra cash fast.
Cash advances also help those with limited savings and credit access emergency funds. Consumers with low credit scores often cannot qualify for credit cards and personal loans with reasonable rates. Cash advances give them options to borrow that may not otherwise exist.
Overview of the Best Cash Advance Options
When you need fast cash, you have many options to choose from. Here are the main types of cash advances and lenders to consider:
1. Traditional Lenders
Credit Card Cash Advances
Nearly all credit card issuers will allow cardholders to withdraw cash against their available credit line. You can access funds directly from an ATM using your card at your bank teller or by making a convenience check payable to yourself. Typical fees include 5% of the amount advanced or a minimum of $10 on the borrowed amount. Interest rates are usually around 20% or higher.
Personal Loans from Banks and Credit Unions
Your bank or credit union may offer personal loans with same-day or next-day funding. These provide access to larger amounts than credit cards, often $1,000 to $100,000. Approval may take longer as your income and credit history will be verified. Interest rates on personal loans are generally lower than on credit cards but higher than other consumer loan products from banks.
2. Online Lenders
Payday Loans
Payday loans are one of the fastest but most expensive cash advance options. Payday lenders allow you to borrow small amounts, usually $500 or less, with repayment due in full on your next pay date. You provide the lender with a postdated check or electronic withdrawal authorization for the loan amount plus fees. Fees typically equate to 15% to 30% of the amount borrowed. Payday loans help fill an immediate and urgent need for fast cash but can trap borrowers in expensive cycles of recurring loans at 400% APR or higher.
Installment Loans
Installment loan companies lend larger amounts than payday loans, often $1,000 to $10,000. These loans are repaid in regular installments or payments over several months or years. Approval for installment loans is quicker than traditional bank loans, but your credit score and income will still be verified.
Peer-to-Peer Loans
Websites like Prosper and LendingClub connect borrowers with individual investors willing to fund loans. You can borrow between $2,000 to $40,000 with loan terms usually 3-5 years. Fees range from 1% to 5% of the loan, and interest rates are typically 7% to 35%. Your credit score and debt-to-income ratio are the main factors that determine your interest rate.
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3. Alternative Cash Advance Options
Cash Advance Apps
A newer option for accessing fast cash is mobile apps like Earnin and Dave. These offer cash advances based on the income you have already earned. You provide the app access to your bank account, and your approved advance amount is based on your recent paychecks or hourly wages. Repayment is taken once you get paid.
Employer Payroll Advances
Some companies may provide salary or paycheck advances to employees in emergency financial situations. The details, fees, eligibility requirements, and repayment terms vary significantly by employer. This option allows you to access earned wages sooner than your normal pay schedule.
Read more: Easy budgeting tips for beginners
Factors to Consider When Choosing a Cash Advance
While having many options for cash advances provides flexibility, it also requires comparing features to find the best fit:
- Interest Rates and Fees: The fees and interest charged on cash advances should be a primary factor. Payday loans and credit card rates are typically the highest
- Repayment Term: Cash advances are designed for fast repayment, often tied to your next pay date. Some installment loans offer longer terms
- Credit Score Impact: Only hard inquiries from loan applications impact your score. Payday lenders typically do not check credit. Using a portion of your available credit limit will likely not hurt your credit score
- Disbursement Speed: Most cash advances are deposited into your bank account within one business day after approval. However, personal loans from banks may take longer than a traditional underwriting process
Source: thebalancemoney.com
Understanding the Risks and Borrowing Responsibly
The convenience and speed of obtaining emergency cash means that cash advances can tempt borrowers to use them repeatedly. Understanding the risks involved and exercising financial discipline when borrowing these short-term funds is vital.
- Potential Debt Traps - If cash advances are used to fund unnecessary expenses beyond emergency needs, you can rapidly incur expensive loan fees and interest charges
- Impact on Long-Term Financial Health – Relying on cash advances to bridge gaps between paychecks masks deeper issues with budgeting, saving, and overall financial health. Developing financial discipline and an emergency fund can reduce reliance on expensive short-term borrowing
- Budget Carefully – Only borrow what you can realistically budget for to pay back on your next pay date. Account for the additional fees and interest as part of your repayment amount
- Pay Off Rapidly – Pay back your cash advance as soon as possible. Do not make just the minimum payment. Knocking the balance down quickly reduces the interest paid
- Assess Alternatives- Explore other options that may provide funds nearly as fast, like credit cards, payment plans, or family loans
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Choosing the Best Cash Advance Options for You
Consider your costs, urgency of funds, repayment capabilities, and alternatives to determine the best cash advance provider for a given situation. Here are some final tips for choosing the right cash advance product:
- Cash advance apps provide affordable options for very small and urgent needs less than $500.
- Installment loans work well for larger borrowing amounts with a longer repayment timeline than loans that must be repaid within a short period.
- Payday loans are costly but may be the only choice for poor credit borrowers. Limit it to real emergencies.
- Whenever possible, utilize lower-cost alternatives like credit cards or employer advances first.
- Compare lender options to find your situation's lowest advertised fees and rates.
Conclusion
The bottom line is that cash advances are important, providing emergency funds when you need them urgently. Cash advances can be used selectively and responsibly as financial lifesavers during temporary cash flow shortages or unexpected expenses between paychecks. Just make sure to borrow only what you need, shop judiciously, and repay the funds quickly to limit fees and interest.
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FAQS
1. What type of lenders offer the fastest access to emergency cash through advances or loans?
Credit cards, payday lenders, and cash advance mobile apps provide funds typically within 24 hours of applying.
2. What risks should I consider before taking out a cash advance loan?
You must consider potential traps of repeat expensive borrowing, long-term financial impact, and risk of overspending beyond emergency needs.
3. How can I borrow responsibly when using different cash advance options?
Budget your repayment capability, minimize interest by paying back quickly, always assess alternatives before opting for a cash advance.
References
https://www.creditcards.com/statistics/cash-advance-survey/
https://www.investopedia.com/terms/c/cashadvance.asp
https://www.wallstreetmojo.com/cash-advance/
https://www.thebalancemoney.com/why-you-should-avoid-a-credit-card-cash-advance-960036
