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What Is a Cash Advance?

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A cash advance gets you quick access to money by letting you borrow against a line of credit. Depending on your financial needs, you can choose from a credit card cash advance, a merchant cash advance or a payday loan.

But while a cash advance may seem like an ideal solution if you need emergency cash, it should be your last resort. Cash advances have pricey fees, high interest rates and poor repayment terms.

A cash advance is essentially a short-term loan that lets you borrow cash from a line of credit. There are three main types of cash advances: credit card cash advances, merchant cash advances and payday loan cash advances. Here’s how each works:

Credit card cash advance

A credit card cash advance lets you use your credit card’s line of credit to access cash. You can typically get a cash advance at an ATM or bank branch, via an online transfer or by using a convenience check from the issuer.

You’ll usually have to pay a cash advance fee of around 5% of the amount of each transaction. For example, if you borrow $1,000, you’ll pay a cash advance fee of $50. It’s also common for credit cards to charge slightly higher interest rates on cash advances than they do on purchases. For example, if your card has a purchase APR of 21.49% to 28.49%, the cash advance APR may be 29.99%.

In addition, credit card cash advances don’t have grace periods — this means you’ll start incurring interest charges immediately after withdrawing your cash.

Pros and cons of credit card cash advances

ProsCons

  Quickly access cash at an ATM or bank branch or through an online transfer

  No collateral required

  Can be less costly than merchant and payday loan cash advances

  You'll start incurring high interest charges right away

  There's a cash advance fee

  Cash advances don't earn credit card rewards

Merchant cash advance

A merchant cash advance (MCA) is a type of business financing that acts as an advance against your company’s future sales. These advances aren’t offered by your credit card issuer — rather, they’re obtained through a partnership with the credit card processor for your credit and debit card sales.

Unlike a credit card cash advance or traditional loan, a merchant cash advance doesn’t charge an annual percentage rate (APR) on the advance. Instead, you’ll be charged a factor rate that’s often much higher than the interest charged on traditional business bank loans. Factor rates typically range from 1.2 to 1.5.

To calculate the amount you’ll owe, multiply the amount you’re borrowing by your factor rate. For example, if you get a merchant cash advance of $12,000 with a factor rate of 1.3, you’ll have to pay a total of $15,600. That’s equivalent to an interest rate of 30%.

Pros and cons of merchant cash advances

ProsCons

  Provide quick cash to cover business expenses

  Often available to businesses with less-than-perfect credit

  Don't require collateral

  The factor rate can be substantially higher than interest charges from a traditional business loan

  Your daily payment may increase if your sales are high — which can reduce your business’s cash flow even more

Payday loan cash advance

A payday loan is an advance on your future paycheck or other income, such as a pension or Social Security payment. These loans tend to be small (usually less than $500) and have very short repayment terms (they’re typically due on your next payday). However, some states allow you to extend your loan by paying an additional finance charge.

Payday loans are extremely costly. According to the Consumer Financial Protection Bureau (CFPB), it’s common to be charged a $15 fee for every $100 you borrow — although that amount could range from $10 to $30 per $100. So, for example, if you borrow $400, have a $15 fee for each $100 you borrow and a four-week term, you’ll end up owing a total of $460.

To secure this type of advance, most payday loan companies will require you to write a post-dated check or authorize them to debit your bank account.

Pros and cons of payday loan cash advances

ProsCons

  Available to those with bad or limited credit

  Doesn’t involve a credit check

  Typically only requires a bank account and proof of identity and income

  Often considered extremely predatory

  Charges very high interest rates

  Comes with very short repayment terms


  Repayment doesn't help build credit


  Not legal in all states

Cash advances should be treated as your absolute last resort, since they come with high fees and interest charges. To avoid landing in a financial situation where you need to turn to a cash advance, try the following:

  • Have an emergency fund. Because financial emergencies can pop up at any time, it’s important to create an emergency fund to cover unexpected costs. A good starting point is at least $1,000. Even better — have enough to cover at least one month’s worth of expenses.
  • Borrow from family members or close friends. By getting a loan from a family member or close friend, you can avoid racking up interest charges and cash advance fees. However, you should make sure that you agree upon a repayment plan ahead of accepting the loan.
  • Take out a personal loan. With a personal loan, you’ll likely receive a lower interest rate than you would with a cash advance. Plus, you won’t be charged a cash advance fee.
  • Get a 0% APR credit card. A credit card with a 0% intro APR on purchases can allow you to make emergency purchases and pay down your balance over time with no interest.
  • Familiarize yourself with the terms and fees associated with the cash advance.
  • Only borrow what you need to avoid increasing your credit utilization ratio.
  • Pay off the loan as soon as possible to avoid racking up high interest charges.

You can generally get a cash advance from your credit card at an ATM, through an online transfer or with a convenience check sent by your credit card company. You may also be able to get cash from your credit card by transferring money through apps like PayPal or Venmo.

A cash advance fee is a charge imposed by the credit card issuer each time you borrow cash against your line of credit. This fee is typically 5% of each transaction or $10 — whichever is greater.

A cash advance credit line is a personal line of credit that allows you to withdraw money as needed.