If you've ever needed cash quickly, you know how much pressure it can be. Nobody likes having financial obligations they aren't sure how to meet, so many turn to a type of financing known as a cash advance. These are short-term loans that don't require an application or a credit check, so it seems like a great option in a pinch. However, cash advances aren't always as helpful as they seem. In many cases, they can even exacerbate an already difficult financial situation.
How do you know when to consider a cash advance, and when you should leave it alone? This guide will introduce you to the concept of a cash advance, as well as the pros and cons associated with it, so you can make an informed decision as to whether a cash advance is right for you.
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What is a cash advance?
A cash advance is a particular type of short-term loan that you can take out of an ATM or bank branch with an eligible credit card. It is important to note that not all credit cards are eligible for cash advances.
"A cash advance is basically where you borrow money from your credit card and pay a pretty exorbitant interest rate upon repayment," said Andrew Schrage, co-founder and CEO of Money Crashers. "It can be also qualified as a payday loan in some instances, which in some ways acts in the same way, although not completely."
Cash advances are an expensive way to borrow money quickly. They typically carry a higher interest rate than normal credit card purchases, often around 25% or higher.
How does a cash advance work?
Cash advances from your credit card can be obtained in several ways.
- In person: You can bring your credit card to your bank and request a cash advance.
- At an ATM: You can enter your PIN and withdraw the cash. Keep in mind ATMs typically have a limit in terms of how much money you can withdraw. If you don't have a credit card PIN, you can contact your credit card company to get one.
- With convenience checks: Some credit cards come with checks you can write to yourself and cash or deposit in your bank account.
Cash advance fees depend on the APR and how long you carry a balance. Here is an example of the cost for a $300 cash advance, assuming you pay it off the next month. Keep in mind that the longer you carry a balance, the larger the fee will be.
|Cash advance fee||3% to 5% of the amount withdrawn, or $10 - whichever is higher|
$300 cash advance = $15 fee
|Cash advance APR||16.99% to 28.99%|
|Cash advance ATM fee||$1.50 to $3.50 per transaction|
|Interest (26.74%) on cash advance||$80.22|
|Convenience check cash advance||3% to 5% of the amount of each advance, or $10 – whichever is higher|
|Cash advance at a bank||3% to 5% of the amount of each advance, or $10 – whichever is higher|
The total cost for your $300 cash advance will be $98.72 assuming you withdraw the money at an ATM at a rate of $3.50 and pay off the cash advance in one month. Those fees will compound every month that you carry a balance.
What are the pros and cons of a cash advance?
Pros of cash advances
Cash advances aren't the cheapest way to access funding, but there are some benefits to this type of financing, including the following:
- Ease of access. A cash advance is one of the easiest methods of financing to obtain, which explains the exorbitant cost. There is very little involved in the process, Schrage said. "The only real requirement to receive a cash advance is that the credit card with which you are requesting one offers cash advances. There's typically no credit check required." This makes cash advances an extremely flexible source of financing for individuals.
- Fast funding. When it comes to cash advances, you won't have to wait days to find out if you're approved, and then more time waiting for the money to land in your bank account. With cash advances, the funding time is much shorter, which is important if you need money right away.
- Freedom of use. There are no restrictions on what you can use the money for when you take out a cash advance, which isn't the same for some other types of funding. Whether you want to use the cash to make payroll or chase growth, you are free to do so with a cash advance.
Cons of cash advances
Cash advances are easy to get and flexible to pay back, but that doesn't mean there aren't negatives associated with this type of financing, including the following:
- They have hefty fees. "Your issuer will charge a cash advance fee, which is typically 3% to 5% of the transaction, with a minimum of $10," said Kevin Chen, a credit card writer at Finder.com. "Even more dangerous, perhaps, is the steep interest rate you'll pay on your cash advance. It's very common for cash advance APRs to be above 25%.In addition, cash advances don't come with a grace period – that is, the window after each billing cycle during which you can pay off your balance in full to avoid interest. Each cash advance will start accruing interest immediately."
- Interest carries on. Just because you make a hefty credit card payment doesn't mean you'll be paying off your cash advance. Any lower-interest credit card balance is paid off before a cash advance, which means a cash advance could still accrue interest at an excessive rate – even after a significant credit card payment. If you carried a balance of $500 on your credit card, and then took a cash advance of $100, you would pay off the $500 before any payments were applied to the higher-interest cash advance of $100.
- Better alternatives. The resounding advice from the experts in which we spoke? Don't take a cash advance unless it is your only option. "Your best bet is to avoid needing a cash advance at all costs," Schrage said. "Instead, you could borrow money from a family member or friend [or] take out a personal loan." [Read related article: Loans You Can Get With Bad Credit]
If you are desperate, Schrage suggested withdrawing more money from your checking account than your balance reflects. "This obviously isn't ideal, because you'll pay a fee, but it is usually less costly in the long run, since you would not be paying interest."
Is a cash advance bad for your credit?
Cash advances don't require a credit check, so they do not necessarily impact your credit score. However, a big factor in your overall score is your credit utilization rate. Your credit utilization rate compares your total credit limit across all credit cards to your total outstanding credit balance. Experts recommend maintaining a credit utilization of no more than 30%. That means at any given time, 70% of your total credit limit should be available. Because cash advances use a portion of your credit limit, excessive withdrawals can ultimately drag down your credit score.
"The dangers of a cash advance usually involve revolving utilization debt," said Chane Steiner, CEO of Crediful. "You borrow against your check or your credit card, and because of the high interest rates, it takes a significant amount to pay this back, which often requires you to take out another advance. This is a slippery slope in terms of debt."
What are the alternatives to cash advances?
Given that cash advances carry a major risk, they should be used as a last resort. Here are some other options you can explore before taking out a cash advance for your small business:
- Take out personal loans. One way to get your hands on cash immediately is by taking out a personal loan. If you have the credit, you may be able to take out a personal loan from an array of banks or other financial institutions.
- Dip into your emergency fund. If you have an emergency fund that you are saving for a rainy day, you may realize that the rain has come. If you find yourself taking out cash advances, you are much better off dipping into your savings than you will be if you take out a cash advance.
- Sell assets. Another alternative to taking out an advance is selling things of value for cash. For instance, you can sell jewelry or clothing online; or a car or bike if there are other methods of transportation you can utilize.
- Phone family or friends. No one likes to borrow money, but if you are taking cash advances, you may just want to call a friend or family member to see if they will loan you the money. You could also ask many people to borrow a small amount of money until you reach your goal.
- Use your credit card. If you need the money for something that you can charge, you are better off just charging it to your credit card.
- Try peer-to-peer lending. Peer-to-peer lending is a type of lending that enables people to borrow money directly from investors, rather than going through a financial institution.
A popular alternative to cash advances may be a small business loan. They come in all types and terms, often with cheaper interest rates than cash advances. Through our research of the best small business loans, we found the following stood out:
SBG Funding is an alternative lender that provides a variety of funding types, including term loans, lines of credit and equipment financing. Terms are flexible, ranging from 6 to 60 months, with loan sizes up to $5 million. Our review of SBG found that its funding is fast and its rates are competitive.
This lender has experience in the industry, having been around for decades. The company makes it easy for you to apply online, responds quickly, and offers a variety of loan types with flexible terms. For instance, it offers short-term bridge loans, long-term loans and asset-based loans. In our comprehensive review of Noble Funding, we found that it has fast turnaround times and competitive rates. It also has a strong reputation among its current and former customers.
Fora Financial provides short-term loans of as much as $500,000 for your small business. This alternative lender is reputable for providing flexible payment terms, offering discounts if you pay off your loan early and not requiring collateral. Our analysis of Fora Financial revealed that it doesn't have any restrictions on what you can use the money for and is willing to work with borrowers with less-than-stellar credit.
Rapid Finance can offer your business fast funding, with money landing in your bank account the same day of approval. Through this lender, you can draw upon a variety of loan products, including small business loans, short-term bridge loans, lines of credit and merchant cash advances. When reviewing Rapid Finance, we found it is willing to look at more than your credit score when approving loans, and doesn't overcharge you in interest.
Cash advance fees
Cash advances are easy to obtain, but you pay for the convenience in fees. Cash advance fees can be charged as a flat fee per transaction or a percentage of the total cash given to you. Some banks deduct the cash advance fee directly from the money advanced to you or bill you when you receive the advance. These cash advance fees are typically included:
- Cash advance APR: This is the total amount your credit card company charges for the cash advance. The APR is usually higher than what you pay for regular purchases.
- Cash advance fee: The fee is charged for the privilege of getting a cash advance, and is usually 3% to 5% of the amount.
- ATM fees: If you take cash from a credit card using an ATM, you may be charged a fee that is separate from what the credit card issuer charges for the cash advance.
Cash advances as a last resort
Cash advances are extremely expensive and potentially dangerous entryways into a vicious cycle of high-interest debt. The best option is to avoid a cash advance altogether. However, if you find yourself in an emergency situation with no other form of fast financing available, a cash advance could help you out of a jam. Even then, it is best to only accept a cash advance if you know you will be able to pay it off quickly.
Ultimately, debt should be a tool, not a necessity. If you can't survive without high-interest financing like a cash advance, it might be time to question the viability of your business model. It may be advantageous to reassess and relaunch your business in a new way, rather than take on a heavy burden of debt.
Cash advance FAQs
What is an example of a cash advance?
An example of a cash advance is when you visit an ATM and withdraw cash from your business credit card using a PIN. You will typically be charged an ATM and credit card fee for the advance.
How is a cash advance repaid?
Cash advances are billed monthly on your credit card statement. The quicker you pay it off, the less interest you'll accrue.
What is a payday loan?
A payday loan is very similar to a cash advance, with one major difference: what you are borrowing against. While cash advances are based on your credit limit, payday loans are based on your future expected income.
"[A payday loan] is a type of cash advance that borrows against your income and expected check," Steiner said. "Again, these have high interest rates and unfavorable terms, but they are approved quickly without considering your credit score."
Payday loans are the personal equivalent of a type of business funding known as the merchant cash advance.
What is a merchant cash advance?
Merchant cash advances are based on the future revenue of your company. If a lender provides a merchant cash advance of $20,000 for your business, you would repay the advance with a percentage of its monthly revenue until it is repaid in full – plus fees.
Merchant cash advances require significant evidence of your existing revenue to secure, and they are among the most expensive types of business financing available. A cash advance is an easier solution, if you are willing to pay the price.
Adam Uzialko contributed to the reporting and writing in this article. Some source interviews were conducted for previous versions of this article.