Cash Advances: How Do They Work? Terms & Fees, Pros, Cons & 4 Alternatives

By Chika


Last Updated: May 10, 2023


Getting a cash advance is one option to receive extra money when you have an unexpected financial emergency that your account can't cover.

There are numerous ways to obtain a credit card cash advance, which is effectively a short-term loan issued by your credit card. 

However, getting one can be expensive in times of need.

Let's take a look at how cash advances work and how to determine whether they're a viable option for you.



What is a cash advance?

A cash advance is a short-term loan that allows you to obtain funds quickly and conveniently.

Banks, credit unions, and other financial organizations frequently provide cash advances to both excellent and bad credit clients. You usually don't need to present collateral to be eligible for one because they are unsecured loans.

Your income and creditworthiness often determine the maximum amount you are eligible to borrow. 



How do cash advances work?

Getting a cash advance is quick and simple.

Typically, you may apply in person or online, and the approval procedure is quick. The money is often transferred into your bank account within one to two business days after you are authorized. 

You will be assessed a fee for taking out a cash advance, which is normally a percentage of the amount you borrow. This charge is typically set by the lender and, depending on the institution and the amount you borrow, can range from 5% to 30% of the amount.

You will often also be charged interest on the amount of the loan. The lender sets the interest rate, which is often greater than one for a conventional loan.



Cash advance terms and fees

Cash advances often come with hefty fees that outweigh any benefits.

Before you take out an advance, review the terms so you’re aware of the high charges. Here are some fees you’ll likely incur when you take out an advance.


1. Cash advance APR.

Cash advances carry a separate, and often higher, interest rate than purchases or balance transfers.


2. Cash advance fee.

Your card issuer often charges a 5% fee of the total amount of each cash advance you request. For example, a $500 advance with a 5% fee will cost you $25.


3. ATM or bank fee.

Banks, credit unions, or ATMs may charge a fee separate from the credit card company's fees.


4. No grace period.

If you use a cash advance, there is no grace period.

This implies that you will start to be charged interest as soon as you withdraw a cash advance.

That differs from when you use your card to make a purchase since the issuer often provides a grace period of at least 21 days. During this time, if your amount is paid in full before the due date, you won't be charged interest.


5. Separate credit limit.

Cash advances often have a separate credit limit that’s a portion of your overall credit limit. You may only be able to take out a few hundred dollars.



Advantages of a Cash Advance

You can swiftly and easily access money when you take out a cash advance, which is one of its main benefits.

In an emergency, when you don't have time to wait for a conventional loan to get accepted, this might be extremely helpful.

Advances also have the benefit of not requiring security because they are unsecured loans, which makes it easier to get authorized.

Finally, even if you have a low credit score, you could still be able to acquire funds, because they are frequently provided to consumers with negative credit. 



Disadvantages of a Cash Advance

The fact that cash advances may be quite costly is one of their main drawbacks.

Before you take one out, make sure you understand the terms and circumstances. The fees and interest rates linked with them are typically significantly higher than those with standard loans. 

Additionally, as these are sometimes short-term loans, you will have to repay the money right away. 

Finally, you can incur additional costs and penalties if you don't repay the loan on time. 



Does a cash advance affect your credit score?

Your credit score won't be negatively impacted by a cash advance, and your credit history won't show that you borrowed one.

However, there are various ways an advance can impact your credit score.

Firstly, the balance will be added to your credit card debt, a high credit utilization percentage might lower your credit score. How much of your available revolving credit you are utilizing is indicated by this ratio. Your credit score might be negatively impacted by a high ratio, especially after it exceeds 30%.

If taking on high-interest credit card debt makes it difficult for you to keep up with your expenses, an advance might also harm your credit. Your credit score is heavily influenced by timely payments; skipping payments might significantly lower your score.

If you obtain an advance and are unable to repay it, your debt may be turned over to collection agencies, which might harm your credit report.



When to Take a Cash Advance

A cash advance on your credit card may seem like the ideal answer when you urgently need money.

However, advances have costs, so consider all of your options before making this choice.

If you determine that this is your only choice, be sure that you are aware of all the associated expenses. Create a strategy to pay off the advance fast and prevent the additional debt from lowering your credit score.



4 Alternatives to cash advances

Here are some alternatives you can consider instead.


1. Borrow from family or friends.

You can request a loan from relatives or friends.

Asking might be awkward, yet it could be the most efficient method to receive the money you require. To maintain your connection, be sure to come up with a payback strategy.


2. Take out a personal loan.

Cash advances seldom have better terms than personal loans, and if you have strong credit, you may be able to obtain more money.

You may often repay a personal loan at a fixed interest rate that is substantially cheaper than the annual percentage rate (APR) assessed by credit card companies.


3. Lending circles.

Small groups of people who pool their money and lend it to other members of the group, frequently at little or no interest, are known as lending circles.

Paying out a lending circle's loan might raise your credit score if they report to the three consumer credit agencies (Experian, TransUnion, and Equifax).


4. Debt consolidation loans.

Personal loans intended to combine debt, such as high-interest credit card bills, into a single loan are known as debt consolidation loans.

It is simpler to save for emergencies or pay off debt when you obtain a debt consolidation loan with lower monthly payments than your current debt. If your credit score is high, you have a better chance of being approved for a debt consolidation loan.




When you need money right away for an emergency, cash advances might be helpful, but you should read the terms and conditions carefully before obtaining one.

Before taking out a loan for a cash advance, it's crucial to be sure you can afford to pay the money back.

Photo by Alexander Grey on Unsplash


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