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Cash Advance: What Is It and Should You Get One?

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Difficult financial situations are bound to happen from time to time for most people. When that happens, it isn’t always obvious where you should turn for help. In these situations, though, a cash advance can be an attractive option because they are quicker and easier to obtain than other options.

Depending on how dire the circumstances are, you may not have the time and energy to consider options that take more time — and involve more paperwork.

But despite their advantages, cash advances can have some significant costs as well. Hence, it’s important to understand what cash advances are all about and how much they could end up costing you. It’s also important to be aware of what alternatives may be available to you should the need arise.

What Is a Cash Advance?

A cash advance is a short-term loan offered by a bank or other financial institution, often with very high interest and fees. But the tradeoff is that they allow borrowers to easily gain access to the funds they need, more quickly than other types of loans.

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When people think of cash advances, they often think of credit card cash advances. That is one of the most common types of cash advances, but it isn’t the only one.

However, the cost of using a cash advance can be high, and it can lead to a never-ending cycle of interest accrual. Hence, it’s important to understand how they work and all of the pieces that are involved.

Types of Cash Advances

“Cash advance” always refers to some form of borrowing, but there is not just one type of cash advance. There are a few common types, but the way each one works is different.

Credit Card Cash Advances

Credit card cash advances are the most common type of cash advance and involve borrowing against a cash advance limit on your account. Note that with this method, there is a cash advance limit, and that limit is usually smaller than your limit for purchases. The cash advance limit is usually just a fraction of your credit limit.

In addition, the APR for credit card cash advances is often several percentage points higher than the APR for purchases and balance transfers. To complicate things further, there is no grace period for credit card cash advances.

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There is a grace period that requires card issuers not to charge interest for at least 21 days after the payment due date. However, cash advances don’t have this luxury and will start accruing interest immediately after you receive your money.

Payday Loans

Payday loans extend small cash advances to individuals to be repaid on the borrower’s next payday. These loans usually require proof of income such as a pay stub to show the borrower is capable of repaying the loan. However, payday loans can also use other sources of income to cover the balance.

Payday loans are short-term loans, usually for small amounts; it’s not uncommon for a payday loan to be for an amount of $100. Nevertheless, their high interest rates can make payday loans a very costly way to borrow.

For instance, the borrower might be charged a $20 fee to borrow $100. $20 sounds like a small fee, but as a percentage, it’s 20% of the principle, which is high. But payday loans tend to have a repayment period of 14 days. Thus, if that 20% interest charge is annualized, it works out to more than 500% APR.

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To make matters worse, some states allow rollovers of payday loans. In this case, any amount the borrower cannot repay by their next payday can be rolled into a new loan. Plus, there can be interest charges, late fees, and other fees to pay. And all of this is on top of our 500% APR mentioned previously.

Merchant Cash Advances

Merchant cash advances are a way for businesses to secure the funds they need. Merchant cash advances use past sales or futures sales projections to determine the size of the advance. This is similar to the pay stub requirement for payday loans. Merchant cash advances are a relatively easy way for small businesses to gain access to the money they need as the whole process often takes just a few days.

How Does a Cash Advance Work?

When you take out a cash advance, you are borrowing an amount that will be subject to interest and fees associated with the advance. There may be extra fees, such as a cash advance fee. In addition, cash advances such as credit card cash advances often come with a higher APR than other types of transactions.

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Depending on the type of cash advance, you may have a few different options for taking out a cash advance. 

Try These Methods:

  • Online. Your card issuer may allow you to request a cash advance through its website or mobile app, saving you the hassle of taking a trip to request an advance.
  • In person. If you have a credit card issued by a bank, you can take the card there and request a cash advance. 
  • At an ATM. You may be able to request a cash advance at your bank’s ATM. However, like most ATM transactions, you’ll need a PIN to be able to request a cash advance this way. If you don’t have a PIN, you can request one; however, your bank may not be able to supply one right away. Hence, you may end up waiting a few days for your PIN.
  • Via convenience check. Your bank may offer convenience checks, which you can write or the amount you need as an advance.

Costs and Fees

There are a few costs and fees to consider if you are thinking about a cash advance. Depending on the terms of the advance, these costs can be significant. Hence, you should be aware of all of the implications before requesting one.

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For credit card cash advances, for instance, the cash advance APR may be higher than that for balance transfers and purchases. Then, in addition to the higher APR, there is a separate cash advance fee you’ll have to pay.

Cash advance fees are typically 3% to 5% of the cash advance amount. Thus, a cash advance of $500 would result in a fee of $15 to $25, on average.

There are other fees you might encounter, too. For instance, if you request a cash advance at an ATM, there might be a fee. That could also be the cash if you request a cash advance in a foreign currency, which could result in yet another fee.

Cash Advance FAQ

Here are the answers to some of the most frequently asked questions about cash advances.
  • Does a cash advance hurt your credit?
    • Requesting a cash advance will not necessarily hurt your credit. However, it will raise your credit utilization, which could hurt your credit if it pushes your utilization too high. Generally, you should try to keep your credit utilization below 30%.
  • What is an example of a cash advance?
    • The most common form of a cash advance is a credit card cash advance. With this type, you ask your card issuer to extend an advance of cash to be paid back later. For instance, you might request a $250 advance from your card issuer. Keep in mind that there will be a cash advance fee, and most credit cards have a cash advance APR that is higher than the APR for purchases.
  • Is an advance a loan?
    • Yes, a cash advance is a loan. Another term for this is a line of credit, which you might see used with your credit card. However, all of these are just terms used to refer to different types of loans.