A cash advance is a short-term loan from a bank or alternative lender, which often comes with high-interest rates and fees. These loans can also include services provided by credit card issuers that allow cardholders to withdraw a certain amount against their available credit. Despite the high costs, cash advances are popular due to their fast approval and quick funding.
Key Takeaways
- A cash advance is a type of short-term loan often featuring high-interest rates and fees.
- Other cash advance types include merchant advances for businesses and payday loans, which are not legal in many states due to their exorbitant rates.
- Cash advances from credit cards can increase your credit utilization ratio, indirectly impacting your credit score.
Types of Cash Advances
Cash advances come in various forms but all share the attribute of high costs. Here are common types:
Credit Card Cash Advances
Credit card cash advances are the most common type, allowing users to borrow against their credit line. Funds can be withdrawn at ATMs or sometimes cashed at banks using special checks. The interest rates for these advances are usually higher than for regular purchases and start accruing immediately without any grace period.
Additionally, there’s typically a fee, either a flat rate or a percentage of the advance amount. Using ATMs might also incur extra charges.
Merchant Cash Advances
Merchant cash advances are loans provided to businesses by banks or alternative lenders. These are typically repaid through future credit card receipts or online sales payments rather than relying solely on the business’s credit score. Alternative lenders evaluate creditworthiness using mixed data points like revenue through accounts like PayPal.
Payday Loans
Payday loans are very short-term and often come with exorbitant fees and interest rates exceeding 100%. They are primarily regulated by state laws and often must be repaid by the borrower’s next payday.
In 26 states, payday loans are legal, with 16 states requiring lenders to offer extended payment plans to mitigate rollover fees.
Do Cash Advances Impact Your Credit Score?
While cash advances don’t directly affect your credit score, their indirect impacts can be significant. Increased credit utilization ratios from high balances can hurt your credit score. High-interest rates may also make it harder to make payments, adversely affecting your creditworthiness.
Cash Advance Pros and Cons
Cash advances could be viable for someone facing an urgent need for funds with plans for a quick repayment. They usually present a preferable option compared to payday loans or car title loans due to lower rates and more flexible repayments.
When Not to Consider a Cash Advance:
- Before declaring bankruptcy: New credit card debt will not disappear in bankruptcy, and such advances may be challenged and excluded from forgiven debts.
- To pay recurring bills: They’re an expensive way to pay bills due to associated high interest and fees.
- To satisfy purchases you can’t afford: This leads to unhealthy debt cycles and can cause emotional and financial stress.
Summary FAQ
What Is a Cash Advance?
A cash advance is considered a short-term loan available through credit cards if you have sufficient balance, or via payday loans.
Can a Cash Advance Impact My Credit Score?
Yes, indirectly. If not paid back quickly, it can raise your balance, affecting your credit utilization rate.
Is a Cash Advance a Good Solution for Emergency Funding?
Cash advances come with high costs, so consider less expensive alternatives. However, in emergencies, they’re fast and accessible with a solid repayment plan.
The Bottom Line
Using cash advances occasionally for emergencies isn’t worrisome, but they are best as short-term solutions. Regular reliance on them requires reassessment in budgeting and spending practices.
Related Terms: loan, credit card, interest rate, debt, bankruptcy.
References
- Capital One. “What Is a Cash Advance on a Credit Card?”
- Office of the Comptroller of the Currency. “Can the Bank Apply Payments to the ‘Purchase Portion’ of the Account First and Then to the Cash Advance Balance?”
- Nav. “Merchant Cash Advance”.
- Consumer Financial Protection Bureau. “What Is A Payday Loan?”
- Consumer Finance Protection Bureau. “CFPB Data Point: Payday Lending”, Page 4.
- Consumer Financial Protection Bureau. “CFPB Finds Payday Borrowers Continue to Pay Significant Rollover Fees Despite State-Level Protections and Payment Plans”.
