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Cash advances: how they work and how much they cost

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Sarah Tew/CNET

If you are experiencing a temporary shortage of cash, a simple solution might be to ask your credit card for a cash advance.

Although it’s a quick way to get cash, the fees can be quite high and much higher than your card’s regular APR. While the average credit card interest rate is 16.22%, the average cash advance rate is 24.80%.

Wondering if getting a cash advance might be right for you? Here’s everything you need to know.

What is a cash advance and how does it work?

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

The line of credit for a cash advance is usually lower than your line of credit for standard purchases – and the APR is usually much higher. Interest usually starts accumulating 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 advances in several ways: by withdrawing cash from an ATM, withdrawing it from a bank by showing your credit card, or through a blank convenience check provided by credit card issuer.

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

Here’s how much a cash advance could cost you

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

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

Another common fee you might be tied to is an ATM fee. The 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 an APR of 24.8% and withdraw that money from an ATM. The cash advance fee alone could be as high as $30. Additionally, there is an ATM fee of $3.50. On day 1, you already get paid $33.50 in fees.

Taking interest charges into account, if you repay this cash advance in 30 days, you will pay $12.23 in interest, which brings the cost of your cash advance to $45.73. If it takes 60 days to pay off the loan, your total interest becomes $24.46, bringing the grand total to $57.96. If it takes you six months to pay off the balance, the total cost of the loan could reach $107.90 on top of the principle.

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

Cash Advance Risks

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

If you already have a credit card balance and cannot repay your cash advance immediately, it will be that much more difficult for you to repay your cash advance in a timely manner. This means that this short term fix could end up costing you dearly in the long run.

Does it ever make sense to take out a cash advance?

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

  • If you are rebuilding your credit: If your credit history is a bit chaotic, you may not have access to 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 approved for a personal loan, or at least one with favorable rates and terms.
  • If you don’t have time to shop: Since other financing options require you to do research to compare rates, terms and loan amounts, if you need that money as soon as possible, it may be a good idea to opt for an advance of funds. You won’t 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 shortage of cash or are experiencing a cash deficit, a cash advance allows you to be sure of receiving money in the very near future.

Cash Advance Alternatives

  • 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 do a strong pull on your credit. And since personal loans are unsecured (you don’t need to offer collateral to back it up), you may need a good credit score to be approved.
  • Advance direct deposit: Some financial services platforms offer the option to have part of your paycheck deposited a few days early without any fees or interest. You usually need to set up direct deposit with a minimum monthly amount to qualify. The sum is usually quite small and, depending on the platform and your eligibility, is usually capped at $150 or $200. Once payday arrives, the advance you received is deducted from your paycheck.
  • Free cash advance: Similar to advance 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 trusted family member who can afford to borrow money from you, it may be worth asking if they are willing to offer you a small loan. Just be careful. Be sure to clarify the terms of the loan and repayment expectations before accepting the money, or you risk damaging a relationship.

FAQs

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

A cash advance and payday loan are quick, short-term solutions to cash flow shortfalls. 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 loan establishment to get a payday loan. While the interest rate on a cash advance is higher than your standard credit card, the interest rate on a payday loan is incredibly 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 of a cash advance are dictated by the credit card issuer, there may be state rules regarding amounts, fees, and costs. payday loan maximums.

Are cash advances hurting your credit?

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

Cash advances also increase your credit utilization, or what is called your credit utilization rate. This is your limit amount that you have used against your credit limit on all your cards. As a general rule, you should aim to keep your maximum credit utilization at 30% and a cash advance can increase this ratio, which could 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.