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Cash advances: how it works and how much does it cost

By on December 22, 2021 0


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Sarah Tew / CNET

If you are having a temporary cash shortage, an easy solution might be to reach out to your credit card for a cash advance.

While this is a quick way to get your hands on some cash, the fees can be quite steep and much higher than your card’s regular APR. While the average credit card interest rate hovers at 16.22%, the average rate for a cash advance is 24.80%.

Are you wondering if a cash advance might be the right choice for you? Here’s all you need to know.

What is a cash advance and how do they work?

A cash advance is pretty much a short term loan that you can access through your credit card. Instead of getting a loan from a bank or an online lender, you borrow against your line of credit.

The line of credit for a cash advance is usually less than your line of credit for standard purchases – and the APR is usually much higher. Interest usually starts accruing immediately with no grace period, which is the time between the end of your billing cycle and when your next payment is due.

You can access cash advance funds in several ways: by withdrawing money from an ATM, by withdrawing it from a bank, showing your credit card, or by means of a blank convenience check provided by the credit card issuer.

The amount of the cash advance will appear on your credit card statement. And just like with standard purchases you make on your card, you’ll make monthly payments until the balance is paid off.

Here’s how much a cash advance could cost you

Interest isn’t the only fee you need to worry about with cash advances – expect to find a few other extra fees.

First, there is usually a cash advance fee, which can range from 3% to 5% of the amount or a minimum charge of $ 5 or $ 10. For example, if your cash advance is $ 200, expect to pay $ 6 to $ 10 in fees. If your cash advance is $ 400, you can plan to pay $ 12 to $ 20.

Another common charge you might be related to is ATM fees. Average ATM transaction fees in 2020 were $ 3.08.

Let’s take a closer look at how much a cash advance could cost you in interest and fees.

Suppose you request a cash advance of $ 600 with 24.8% APR and withdraw that money from an ATM. The cash advance fee alone could go up to $ 30. In addition, there is an ATM fee of $ 3.50. On day 1, you already receive $ 33.50 in fees.

Factoring in the interest charges, if you repay this cash advance within 30 days, you will pay $ 12.23 in interest, bringing the cost of your cash advance to $ 45.73. If it takes 60 days to pay off the loan, your total interest is $ 24.46, bringing the total to $ 57.96. If it takes you six months to pay off the balance, the total cost of the loan could be up to $ 107.90 on top of the principle.

It is in your best interest to pay your cash advance balance as soon as possible. Otherwise, you could end up with interest charges.

Risks of cash advances

The main risk in taking out a cash advance is the potentially high interest rates you might end up paying. If it takes you a while to pay off your balance, it could cost you a pretty penny in interest charges alone, not to mention the other fees on top of it.

If you already have a credit card balance and can’t repay your cash advance right away, it will be even more difficult for you to repay your cash advance on a timely basis. This means that this short term solution could end up costing you considerably in the long term.

Does it always make sense to take a cash advance?

While a cash advance can be quite expensive and do more harm than good, there are a few times when it can be a good option:

  • If you rebuild credit: If your credit history is a bit bumpy, you may not be able to access other types of financing, such as a personal loan. This is because personal loans generally require good credit.
  • You have a high debt ratio: If you have a high DTI ratio, you may not be able to get approval for a personal loan, or at least a loan with favorable rates and terms.
  • If you don’t have time to shop: As other financing options require you to do some research to compare loan rates, terms and amounts, if you need that money sooner rather than later, it may be a good idea to go for an advance of funds. You will not need apply for a new credit card or a loan, and you can get the money through an ATM.
  • If you can pay it right away: If you have a very temporary cash shortage or experience a cash flow gap, a cash advance allows you to count on receiving money in the very near future.

Alternatives to cash advances

  • Personal loan: If you have good credit and a stable income, you may be eligible for a Personal loan. Some personal loans allow you to borrow a minimum of $ 1,000 and give you access to funds quickly after your application is approved. However, when applying, the lender will pull your credit hard. And because personal loans are unsecured (you don’t need to post any collateral to back them up), you might need a good credit rating to get approved.
  • Early direct deposit: Some financial services platforms offer the option of depositing part of your paycheck a few days early without fees or interest. You usually need to set up a direct deposit with a minimum monthly amount to be eligible. The sum is usually quite small, and depending on the platform and your eligibility, it is usually capped at $ 150 or $ 200. When the payday is over, the advance you received is taken from your paycheck.
  • Free cash advance: Similar to early direct deposit, a handful of money apps and online financial platforms offer the option of receiving a small cash advance. The advance is usually capped at a lower amount, but it is free and no interest is charged.
  • Ask friends and family: If you have a good friend or family member who you trust who can afford you the opportunity to borrow money, it may be worth asking if they’re willing to offer you a small loan. You just have to walk carefully. Make sure you spell out the loan terms and repayment expectations before you accept the money, or you could risk damaging a relationship.

Faq

What is the difference between a cash advance and a personal loan?

A cash advance and a payday loan are quick, short-term solutions to cash flow gaps. Dollar amounts tend to be modest. Both are known to have high interest rates and fees.

The biggest difference between a cash advance and a payday loan is that you will have to go through an online payday lender or set foot in a payday lender establishment to get a payday loan. While the interest rate on a cash advance is higher than the standard APR on your credit card, the interest rate on a payday loan is insanely high – we’re talking triple digits. It can be 400% or more. You are also required to repay this money promptly, usually within two weeks.

Another difference between the two is that while the rates and terms for a cash advance are dictated by the credit card issuer, there may be state-specific rules regarding amounts, fees, and costs. maximum payday loans.

Are cash advances bad for your credit?

Cash advances can hurt your credit if you don’t meet minimum payments. Just as late payments on credit card purchases can hurt your credit, so can your prepayments.

Cash advances also increase your use of credit, or what’s called your credit utilization rate. This is the portion of your limit that you have used against your credit limit on all of your cards. As a general rule of thumb, you should aim to keep your maximum credit usage at 30%, and a cash advance can increase this ratio, which could potentially lower your credit score.

What are the interest rates on cash advances?

The average APR on cash advances is 24.80%. Some cards offer a single APR on cash advances, while others offer a range based on your creditworthiness.

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