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What is a cash advance?

A cash advance works like a short-term cash advance designed to cover unexpected expenses or emergencies. Cash advances usually 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 pros and cons of each option before deciding which option is right for you.

What is a cash advance on a credit card?

The most common form of cash advance is the credit card cash advance. When you take a cash advance on a credit card, you are borrowing money from the available balance on your credit card. It works much like withdrawing cash from an ATM using your debit card, except the money comes from your credit limit and not your bank account balance. This means you have to pay it back with interest.

Unlike using your credit card to purchase goods or services, credit card cash advances accrue interest on the withdrawn amount as soon as you withdraw the money. Also note that most credit card companies will not allow you to draw down your entire line of credit in the form of a cash advance. For most consumers, cash advances are limited to a few hundred dollars.

Credit card cash advance transactions can be completed using your PIN at an ATM or with a convenient check mailed to you by your credit card issuer.

How do I get a cash advance on a credit card?

A cash advance on a credit card means you are borrowing money against your credit card’s credit limit. To get a cash advance from a credit card, you have three options:

  • Via an ATM to process the cash advance with your credit card PIN
  • By visiting the bank that issued your card in person
  • By sending a convenience check
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Be aware that if you have a cash advance on a credit card, you are likely to incur high fees. These fees include a separate cash advance APR with a higher interest rate and card issuer and ATM fees.

Cash advances often have a separate credit limit that is a portion of your existing credit card limit. Depending on your individual limit, you may only be able to withdraw a few hundred dollars. There is also no grace period for paying back the cash advance as the interest accrues the same day you withdraw the money.

What is a Payday Loan?

Payday loans are short-term loans where the borrower repays the lender on the next payday; unless the borrower wishes to extend the loan – in which case additional interest will be charged. Payday loans typically range from $50 to $1,000, but despite the small amount of money borrowed, lenders sometimes charge insanely high interest rates up to 400%.

Be careful when considering a payday loan. A payday loan can keep you in a cycle of debt, and payday loans come with high fees and interest rates. If you cannot repay the loan within the allotted time, you can “repost” the loan, but the high cost of the loan will become even higher. Consider a few Alternatives to payday loans instead of this.

What is an installment loan?

As the name suggests, installment loans are a type of cash advance where the amount borrowed is repaid through multiple scheduled repayments over an agreed period of time. Common installment loans include car loans, student loans, and mortgage loans. For each installment, the borrower repays part of the borrowed amount and pays interest. Typically, installment loans have lower interest rates and more flexible terms than other types of loans.

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For borrowers who are in a good position to make regular and steady payments, installment loans can be an advantageous form of cash advance. If you are unable to make your scheduled payments, there is a high risk of defaulting on the loan, which can result in loss of collateral, debt, and decline credit-worthiness.

What is a merchant cash advance?

A merchant cash advance is designed for companies or merchants to help them fund their business. These types of cash advances offer alternative financing to a traditional small business loan. Typically, a business owner receives an amount of money up front and then takes a percentage of all credit card sales until the amount is paid off in full.

While this type of cash advance can be beneficial for some business owners, it’s important to remember that interest rates can be very high and fees can add up quickly. Because of the speed and ease of merchant cash advances, business owners can find themselves in a cycle of debt that can be difficult to break out of.