What is a Cash Advance? Understanding the Types, Terms, and Common Fees

There may come a time when you need cash now, but your bank account (if you have one) is nearly tapped out. That’s when cash advances can come in handy. They allow you to borrow money quickly without a lengthy approval process.

You can get a cash advance from a credit card or a payday lender, and businesses may use merchant cash advances to finance their operations. In this article, I’ll explain the different types of cash advances – how they work, what they cost, and their pros and cons. I’ll also describe a few alternatives that may cost less and serve you better.

First, let’s establish that cash advances are different from personal loans. 

You can obtain a personal loan by applying with a bank, credit union, or online lender. You collect the approved loan in a lump sum and gradually pay it back in equal monthly installments over a fixed period. 

Interest rates and fees are usually lower for personal loans than cash advances, payday loans, and merchant cash advances. Personal loans have an extended repayment period, which may make them more affordable when you have a more significant or long-term financial need.

Cash advances, payday loans, and merchant advances are all ways to secure quick cash, but the three have several differences. The first two methods are for individuals, while the third is for businesses to raise money quickly. Let’s explore each type of cash advance.

Credit Card Cash Advances

A credit card cash advance allows you to use your card to get cash, though it doesn’t come cheap. In addition to having a relatively high interest rate and costly fees, the interest starts to accrue immediately. This option is often used for emergencies, but it can be expensive.

As Easy as Using an ATM

You can get a cash advance with your credit card by using an ATM or walking into a bank. With the former, you use your card at an ATM, similar to a debit card. Put your card in, enter your PIN, select cash advance, and take the money. 

Alternatively, you can walk into a bank, visit the teller, show your credit card, and request a cash advance. 

Lower Limits, Higher Fees

Cash advances are subject to certain limits. You can’t withdraw above a set amount, which may be less than your regular credit limit. For example, if your credit limit for purchases is $5,000, your cash advance limit may be $1,000 or less.

Credit cards charge a fee for this service, typically 3% to 5% of the amount you take out. For example, if you were to make a $500 withdrawal, you may be charged between $15 and $25. 

Some cards, particularly those for consumers with bad credit, may charge even more.

Interest Rates Can Be 24% or More

The APRs for cash advances are typically higher than those for purchase transactions. You probably have a grace period on your credit card purchases, meaning you can pay your monthly balance without interest. That’s not true with cash advances, which lack grace periods and start charging you interest immediately.

Cash advances can carry interest rates of around 24% or more, often higher than those for regular purchases. That means cash advances can be costly if you do not repay them quickly,

Payday Loan Cash Advances

Payday loans are meant to help you with your financial needs until your next payday. You can get them at a payday loan storefront or through an online lender. 

The interest rate is high, and you must repay the loan within a short period, usually one to four weeks. If you cannot repay on time, you will likely need to roll over the loan, which means renewing it for another cycle. This will add more fees and interest to the amount that was initially due.

Quick Loans With High Fees

Payday loans are short-term loans that provide quick cash until your next payday. You can get these kinds of loans from payday lenders. They are often small amounts, usually up to $500, sometimes more.

You must repay the advance and fees on your next payday. Payday loans assist you in accessing cash fast when you need it most, but they are costly due to the high charges involved.

No Credit Checks Needed

Before you can get a payday loan, you must meet certain requirements. First, you must be at least 18 years old. In addition, you need to have some income source, such as a job or benefits, demonstrating that you can repay the loan. 

Lenders will want a valid ID and proof of income, such as a pay stub. You also need a checking account to deposit and withdraw money when it is due for online payday loans. 

Payday storefronts may accept post-dated checks instead of directly accessing your bank account. The check is future-dated for your next payday and covers the loan amount, interest, and fees, which can add up to 300% APR or more in some states.

Few payday lenders run credit checks, making qualifying easy even if you have poor credit or no credit history.

Merchant Cash Advances for Businesses

A business may turn to a merchant cash advance (MCA) when it needs a lump-sum cash infusion. These advances are pricey, primarily due to high fees and factor rates well above those for traditional business loans.

You repay the advance by making daily payments based on a set percentage of your business’ credit and debit card sales. 

Trading Future Profits for Capital

Merchant cash advances are not loans. You secure the advance with an agreed-upon portion of your business’s forthcoming sales. Your advance is a prepayment based on the predicted value of future credit card transactions that your company will process.

In other words, the business owner pledges a portion of future sales to get some working capital immediately. Many companies use this method when confronted with emergency needs or fleeting opportunities.

Businesses may routinely rely on MCAs to accelerate their collections. MCAs are helpful for small businesses because they take less time to approve and process than traditional loans.

Daily Payments Based on Sales

Merchant cash advances are repaid differently than loans. Instead of sending in fixed monthly payments, the MCA provider draws a daily percentage of the business’s sales. For example, a business may pledge 25% of average daily sales to get an MCA. The company will pay more during heavy sales days and less on days with lighter activity. 

This process continues until the entire amount and any applicable fees are repaid. This repayment flexibility helps businesses manage their cash flows, but it is expensive compared to traditional loans.

While they are a quick way to access funds, cash advances can incur heavy fees. The following list outlines some of the costs of cash advances from credit cards, payday loans, and merchant cash advances. It shows the interest charges, ATM fees, service charges, and late payment charges.

Cash Advances Have Lower Interest Rates

• Credit Card Cash Advances: Generally charged at high interest rates of 24% APR or more. For example, if you take a one-month, $500 cash advance at 25% APR, you’ll pay $10.42 in interest. This is a lower rate than payday loans and MCAs.
• Payday Loans: Very high interest rates, usually 300% to 700% APR. The finance charge determines the interest rate. For example, if you pay a $100 fee for a two-week, $500 payday loan, your equivalent APR will be more than 520%.
• Merchant Advances: Factor rates are generally between 1.1 and 1.5, typically resulting in an APR of 60% to 350%. For example, suppose a merchant takes a $10,000 MCA and pledges 25% of credit card sales, typically $20,000 per month. With a 1.3 factor, the business must pay about $166.67 daily for 78 days, including $3,000 in fees. This translates into an effective APR of 254.59%, which will be higher if other fees also apply.

Expect Service Charges of 3-5%

• Credit Card Cash Advances: Credit card companies charge service fees of 3% to 5% of the cash advance amount, separate from ATM fees. For example, a cash advance of $500 may trigger a $15 to $25 service charge. A few credit card issuers charge even higher fees.
• Payday Loans: Loan finance fees are typically between $10 to $30 per $100 borrowed but can be higher in certain states. The loan finance fee, loan amount, and repayment period determine the loan’s APR.
• Merchant Advances: Service fees can also involve origination and monthly maintenance fees. Origination fees on MCAs run between 2% and 5% of your advanced amount. This fee is deducted from your advanced value, so your actual amount will decrease. For example, if you get a $10,000 advance and the origination fee is 3%, then $300 will be taken out of the $10,000, leaving you with $9,700. Note that this is one of several types of fees that vary by provider and other terms and conditions.

Late Payment Fees and Other Penalties

• Credit Card Cash Advances: Late payments can trigger a penalty APR (typically 29.99%), which applies if the issuer does not receive a payment on time. Late payments are reported to the credit bureaus, which can lower your score when overdue by 30+ days.
• Payday Loans: Late fees apply when you don’t repay on time. The interest is rolled over into the principal, and new fees are applied. Payday loans typically only impact your credit score if they go into collection.
• Merchant Advances: Late payment may result in increased charges and legal action. Late payments damage a business’ credit scores.

In contrast to short-term cash advances, personal loans tend to have repayment periods of a year or longer. A personal loan will have an interest rate, an origination fee, and perhaps late fees and prepayment penalties. 

For example, suppose you borrow $5,000 at a 10% nominal interest rate for three years, and the loan has a 3% upfront origination fee. After the origination fee is withheld, you get $4,850 in your bank account. Under those terms, your monthly payment would amount to approximately $161.34. Over three years, this adds up to $808.09 in interest, making the total cost of the loan (i.e., origination fee plus interest) $958.09. This works out to an APR of approximately 112.11%.

Cash advances, payday loans, and merchant advances are helpful during times of need since they provide cash quickly. Almost anyone can get these loans since a credit score is seldom needed to qualify. 

However, these loans will charge high interest rates and fees. The costs may plunge you into a debt cycle from which it becomes difficult to escape. Understand the benefits and drawbacks before taking out these types of loans.

Benefits: Convenient and Fast

• Ease of Access: Cash advances are relatively easy to get. You can obtain them through credit cards or other mechanisms, such as payday loans. In addition, a good credit score is often unnecessary to get a cash advance. Approvals are generally quick and easy.
• Immediate Funds: You receive cash immediately. There is little or no waiting, unlike with traditional loans. That’s convenient during emergencies. You can quickly borrow money at an ATM for credit card cash advances.

Drawbacks: Easy to Get Trapped in Debt

• High Costs and Fees: This form of borrowing levies relatively high interest rates, which are higher (sometimes astronomically so) than those for regular credit card purchases. Other charges may also apply. This makes this kind of borrowing, especially payday advances, expensive.
• Debt Trap: Cash advances come at high interest rates. Additionally, there are extra fees that include processing fees or transaction fees. Therefore, cash advances become expensive, especially if you miss payment dates. Repeated failure to make payments can dump you into a debt spiral that may deposit you in bankruptcy court.

You can enjoy the benefits of a cash advance with little downside through responsible borrowing practices.

The goal is quick cash when needed. However, some cash advances are too expensive due to high fees and interest rates. Fortunately, you have viable alternatives. Considering these valuable options, you could save money and manage your finances more effectively.

Personal Loans Are More Flexible

Personal loans generally impose lower interest rates than cash advances. Even though a cash advance can give you an interest rate of 24% or more, personal loan interest rates may be as low as 6% (up to 36%) based on your credit. 

Not just that — personal loans also come with much more flexible repayment periods, typically one to seven years. This means you repay your loan in small monthly installments instead of being exposed to high, immediate charges. 

Applying for a personal loan is easy. It begins with researching and comparing different lenders to find one with reasonable rates and terms. Once you’ve chosen your lender, complete an in-person or online application form requesting personal information, proof of income, and details about your employment. 

After submitting the application, a lender reviews it, which usually takes only a few minutes. Once approved, the loan amount will be transferred to your bank account within the next business day.

Use Credit Cards for Purchases Instead of Cash Advances

Using your credit card for purchases instead of taking a cash advance can save you money. For starters, a card’s purchase APR may be several percentage points lower than its cash advance APR.

Moreover, most credit card purchases have a grace period, so interest won’t accrue if you repay the balance by the due date. 

Credit card cash advances do not have grace periods. Therefore, borrowing money through credit card purchases costs less than getting a credit card cash advance.

Build an Emergency Fund

Maintaining an emergency fund, a savings account for unexpected expenses such as medical bills, car repairs, or job loss, will help forestall dependence on cash advances during financial crises. 

A financial cushion can enable you to manage emergencies without resorting to expensive loans and cash advances. Here are some savings tips:

• Save enough to cover three to six months of living expenses in an emergency.
• Keep track of all your individual savings goals. Make it routine by having some amount automatically transferred each month from your checking account to your savings account.
• Review your budget for areas to cut the flab — e.g., dining out or subscription services. 
• Keep your emergency fund in a separate, insured account and avoid using it in non-emergency situations.

Emergency funds let you collect interest rather than pay it. You can get your money right away without jumping through hoops. It also helps build your credit score by keeping you out of debt.

Cash advances can be costly. You’ll often fork over a higher interest rate than that for credit card purchases or other personal loan options. There is also no grace period for interest on credit card cash advances — it begins to accumulate immediately.

Cash advances and payday loans can have high APRs but tend to carry some nasty supplementary fees that inflate the overall cost. Cash advances may lead to severe financial strain in the long term, and you should always explore alternative options before deciding.