Cash Advance Loans

Cash Advance Loans And What They Are Used ForThere are 183 million credit card users in the United States, who chose one of the 579 million credit cards from their wallets to spend $4.442 trillion in the 2014 economy.

Yet, there are still some places where cash is king and credit cards are not accepted.

Auto mechanics, landlords, local restaurants, lawn maintenance workers and your neighborhood baby sitter are just a few of the businesses that prefer cash and pass on credit.

So what happens if you spent your last dollar at the local restaurant, your car broke down on the way home and you need the baby sitter to stay an extra hour while you get this mess straightened out?

It might be a good time to get a cash advance.

Cash advances are short-term loans that do the job when credit cards aren’t accepted. They are a quick-fix solution when a financial emergency happens. They also could be used if you don’t have enough money in your checking account or your paycheck is coming in late or is less than usual and you have to pay a bill immediately.

You can get cash advances from banks, ATMs or, if the situation is really desperate, payday lenders. Cash advances are easy to obtain in most areas and are a good, short-term solution, but they carry considerable risk if you can’t pay them back quickly, or get in the habit of using them too often.

Using Your Credit Card to Get Cash

Ironically, you need a credit card to start the process for getting a cash advance at a bank or ATM. Present your credit card at a bank and in most cases, you can receive the amount available on your cash credit line, which is determined by your balance and how many purchases you’ve made. The same is true at an ATM, where you will need your credit card and a pin number.

While you think cash advances might be part of a regular bank or ATM transaction, they are not. Banks apply severe transaction fees and interest rate charges for this service.

Cash advances also are available from payday lenders, who typically require you to fill out an application and write a personal check for the loan amount plus transaction fees. The fees from payday lenders are considerably higher than those associated with credit cards so read the contract closely. It is important to understand the repayment schedule (usually two weeks) and the APR (annual percentage rate for interest) involved with dealing with payday lenders.

The final way to get a cash advance is with “convenience checks.” These are slips of paper that look very much like a regular check and often arrive with your credit card statement. They invite you to make out the check to yourself for cash. Convenience checks are simply a faster form of cash advances. There is no application to fill out, just write in your name and the amount you want.

The problem is that the same fees, sometimes even higher, apply as if you had gone to a bank or ATM with your credit card.

Cash Advance Fees Can Be Large

There are several reasons to avoid cash advance loans, primarily due to the fact that these loans carry heavy fees and interest rates. Cash advances usually involve a transaction fee, which normally is 5 percent of the amount received. Thus, a $500 cash advance will cost you at least $525 to repay.

The interest rate charged on cash advances averages six percent higher than for normal credit card purchases. The median interest rate is 24 percent.

That interest rate is charged the day you receive the cash advance as opposed to the normal 30-day grace period for purchases with a credit cards. That can add a considerable amount to the fees, depending on how long you take to repay it. There could be an additional fee of $2 to $5 for using a bank or ATM that is outside your network.

A $100 cash advance from a payday lender with a $15 fee, which is typical for payday lenders, has an annual percentage rate of 391 percent.

Cash Advance Alternatives

The old saying “There is a way around everything,” certainly applies to cash advances, if for no other reason than the cost of taking one is prohibitive. That is the primary reason only 4 percent of cardholders actually use this feature and the total amount for cash advances in 2014 was just $90.90 per cardholder.

Some other choices that you can make include:
  • Shop only at businesses that accept credit cards. There is a 30-day grace period before interest charges apply to credit card purchases, giving you time to get the money needed for repayment.
  • Avoid unnecessary purchases. If you can go without spending money on this item or service until your next paycheck or cash infusion arrives, it would be best to wait.
  • Always have an emergency fund. Set aside some portion of your paycheck, even as little as 1 or 2 percent, to help you deal with emergency situations that are bound to arise.
Bill Fay

Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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