Cash Advance Loans: Everything You Need to Know

Cash advance loans, also known as payday loans, are short-term loans that help cover emergency expenses. They’re available through banks, credit unions, online lenders, lending apps, or other sources. Typically, borrowers receive funds in a lump sum and need to repay the amount with interest in full within a few weeks.

Taking out cash advances is convenient when you’re in a hurry, but they often come with high interest rates and fees, which is something to consider. They’re slowly becoming a mainstream financial tool people are using to make purchases or pay bills that cannot wait.

From what we found out, credit card cash advances are one of the most common types of credit people use when they need money urgently. But are they safe, or should you consider other alternatives? 

In this guide, we’ll tell you everything you need to know about what a cash advance is, what types are available, how each of them works, and whether or not you should get one.

Types of Cash Advance Loans

There are many different types of cash advances, and you can get them from different sources. A few examples of these fast cash loans are credit card cash advances, payday loans, merchant cash advances, line of credit advances, employer cash advances, pawn shop loans, etc.

All of them let you access the funds you need quickly, and approvals are easy as well. But some of them charge higher interest rates than others, and it’s best to use them only as a last resort.

Credit Card Cash Advance

When you use your credit card’s line of credit to borrow cash from an ATM, it is known as a credit card cash advance. While it may sound tempting to have such easy access to the money you need during an emergency, it is not recommended to use this option.

Interest rates for cash advances from a credit card are way higher than the usual purchases you make using the same card. The interest also starts accumulating immediately without any grace period for paying off the balance. Overall, it is just a very bad deal for your financial health.

If there is no other alternative to turn to or you’ve been turned down for a bank loan, you may still use your credit card to borrow money with certain precautions. Trying to pay off as quickly as possible is one way to limit the interest you end up paying.

It is also advised not to borrow more than 30 percent of your credit card’s limit, or you may end up hurting your credit score and closing the doors for future borrowing.

Payday Loans

Payday loans are unsecured short-term loans you can borrow through lending apps or directly through lenders. Approvals are often easy, fast, and without much documentation. You don’t need to offer collateral, and most lenders offer loans with no credit check required.

However, the interest rates are extremely high, often crossing 400 percent! A few lenders still provide lower rates, but shortlisting can become time-consuming. If you want to avoid bad lenders, explore your options, and get the best payday loans online, try out our free-to-use platform that helps you get pre-approved with good lenders in a single application.

Merchant Cash Advance

Merchant Cash Advance (MCA) is a short-term loan where businesses can borrow cash upfront in exchange for giving the lender a percentage of their future sales. During a loss, emergency, or capital need, merchant cash advances are a great option to turn to.

Just like with every other loan, you still need to consider the interest rates, percentage you’ll need to share with the lender, loan term, etc., before signing any documents.

Line of Credit Cash Advance

A line of credit is a type of loan where you can borrow up to a set limit, repay, and borrow again until you’re staying within the limit set by the lender. They’re usually available through banks or credit unions. It is like an open line of credit where you may borrow as many times as you want.

Personal LOC, Business LOC, and Home Equity LOC are three different types of LOCs from which you can choose. You need to pay interest on the amount you borrow, and there are some fees, too. Lines of credit often lead to overspending, which is something to consider.

Employer Cash Advance

This is perhaps a traditional form of cash advance, which has been in the lending landscape for ages. Before, people used to borrow money from their employers as a form of getting their paychecks in advance. 

This is okay if you’re really struggling with an urgent expense, but it is not recommended if you’re thinking of taking your paycheck in advance often. You will get the money, but what about future expenses? It just means longer periods of waiting to get paid between consecutive paychecks.

Pawn Shop Loans

Pawn loans are secured loans where you can mortgage valuable items with the shop owner in exchange for the item’s value. The lender will tell you how much they can offer you for the item, and you can later repay the loan with interest to take your thing back.

Usually, jewelry, antiques, musical instruments, watches, cars, electronics, etc. can be pawned to get money. In case you fail to repay, the pawn shop has the right to take possession of the collateral/item you used for borrowing the loan.

If you’re confident that you’ll be able to repay the loan or you’re okay with the risk of losing a valuable item you own, then pawn loans can help you with the money you need. You may find shops locally or online that are willing to lend you.

Crypto Cash Advance

As an emerging trend, people are now lending money by accepting cryptocurrency (Bitcoin, Ethereum, etc.) as collateral. But it also involves a risk of losing your crypto if you’re unable to pay it back, and the loss could be significant.

Pros & Cons of Cash Advance Loans

Each option we mentioned above has its own advantages and disadvantages, and a few are common among them all:

Advantages of Cash Advances

• Faster Approvals
• No Credit Check
• No Collateral (except pawn loans and crypto advances)
• Help in Emergencies

Disadvantages of Cash Advances

• High Interest Rate & Fees
• Shorter Repayment Period
• Risk of Debt Cycle

Hidden Cost of Cash Advance Loans

Whenever you borrow a loan, you pay a percentage of your loan amount as interest. Apart from that, lenders also charge you a fee for processing the loan. Both of these combined are known as APR (Annual Percentage Rate), which is the overall cost you pay for borrowing money.

Generally, most consumers look at the interest rate alone while comparing different loan offers. What happens is some lenders charge low interest rates but high fees, resulting in an overall expensive deal. It is, therefore, always better to weigh the APRs for different loans since they contain both fees and interest. This way, you’re borrowing safely by staying aware of the entire cost.

Also, credit card cash advances follow compounding interest. So, while the interest starts accruing immediately, each day, the interest will be added to the owed balance. On the next day, interest will again be charged to the new balance. 

Technically, every day, you’ll be charged interest on the amount you owe plus the interest as well. Over time, this can lead to a significant amount of balance, which you must repay.

How Do You Qualify For a Cash Advance Loan?

Fast cash advance loans have very basic requirements when it comes to documentation and loan process. Here’s what you’ll need:

• Active Checking Account
• Government-issued ID
• Income Proof
• Residence Proof
• Social Security Number (SSN)
• Low Debt-to-Income Ratio

How to Use a Cash Advance Loan Wisely?

Cash advances aren’t bad in themselves. If used properly, these emergency cash loans can serve as a great backup for when you need money immediately. Here’s what you can do:

• Use cash advances only for emergencies.
• Calculate the total cost before borrowing.
• Try to repay quickly to avoid interest.
• Only borrow what you absolutely need.
• Try negotiating better terms with the lender.

In Summary

Cash advance loans help you borrow the money you need during an emergency. They often come with high interest rates and significant fees. You may use them for various urgent expenses like paying medical bills, rent, consolidating credit card debt, etc. 

Different types of cash advances include credit card cash advances, payday loans, merchant cash advances, pawn shop loans, line of credit cash advances, employer cash advances, etc. When used by making an informed choice, these can be used as a substitute for your emergency funds.

Always consider the loan terms, interest rates, and repayment period before agreeing to any loan option. Got more questions? Feel free to write to us in the comments.