Essentially a short-term loan, cash advances can be a convenient way to get money when you’re in a pinch. Before going down this route, research your options and choose the right type of cash advance for your situation.
We’ve all been in a situation where we need cash fast and don’t have sufficient funds at our disposal. Whether you are shopping at a cash-only retailer or are facing a one-time emergency, a cash advance might feel like your only option.
Cash advances are typically an easy way to get fast money. While you don’t want to rely on cash advances regularly, you might use them if you are short on funds and unable to charge an expense. But before doing so, make sure you understand the ins and outs of cash advances.
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How Do Cash Advances Work?
A cash advance is a short-term cash loan intended to cover an unexpected expense or emergency. Cash advances tend to come with high-interest rates and fees.
There are 4 main types of cash advances – credit card cash advances, payday loans, installment loans, and merchant cash advances. All of these options can deliver cash in a hurry, but each works a little differently. Consider the advantages and disadvantages of each before deciding which option is right for you.
The most common type of cash advance is a credit card cash advance. When you take a credit card cash advance, you are borrowing money from the available balance on your credit card. It works in a similar way as withdrawing cash from the ATM with your debit card, except the money comes from your credit limit rather than from your bank account balance. This means you will have to pay it back with interest.
Unlike using your credit card to purchase goods or services, credit card cash advances start incurring interest on the withdrawn amount as soon as you take the money out. Also, be aware that most credit card companies won’t allow you to take your entire credit line in the form of a cash advance. For most consumers, cash advances are capped at a few hundred dollars.
Credit card cash advance transactions can be performed by using your PIN at an ATM or by using a convenience check mailed to you by your credit card issuer.
What Is a Payday Loan?
Payday loans are intended to be short-term loans, in which the borrower pays the lender back on their next payday; unless the borrower wishes to extend the loan – in that case, additional interest is charged. Payday loans typically range from $50 to $1,000, but despite the small amount of money borrowed, lenders often charge insanely high-interest rates, sometimes up to 400% .
Heed caution when considering a payday loan. Getting a payday loan can keep you in a cycle of debt, and payday loans come with hefty fees and interest rates. If you can’t repay the loan by the allotted deadline, you can “roll over” the loan, but the already steep price to borrow grows even higher. Consider some payday loan alternatives instead.
What Is an Installment Loan?
As the name suggests, installment loans are a type of cash advance in which the amount borrowed is paid back through a number of scheduled repayments over an agreed upon time. Common installment loans are auto loans, student loans, and mortgage loans. For each installment payment, the borrower repays a portion of the amount borrowed and also pays interest. Typically, installment loans carry lower interest rates and more flexible terms than other loan types.