What is a Cash Advance? Here’s How it Works

Michael Collins
July 8, 2020

What is a Cash Advance?

A cash advance is a small loan that can give you cash quickly if you are in need. A cash advance is just another word for a payday loan or a payday advance. Cash advances often come from your credit card company and they can be taken out at your bank or ATM. When you take out a cash advance, you are getting loaned money against your line of credit with your credit card provider. Cash advances are mostly offered by credit card companies but other institutions can offer them as well. Instead of taking money out of your bank account with a withdrawal, you are getting cash that has to be paid back at a later date or over time.

Cash advances can help you get cash fast. If you need some cash for an emergency before your paycheck comes in, you could use a cash advance to get that money and use your paycheck to pay it off when it comes in. Likewise, a cash advance could be used to give you cash if your bank account balance is too low. You can also use cash advances to pay for things that you can’t pay for with your credit card. Cash advances can be helpful, but the fees and interest that come with them can make them expensive as well. Cash advances aren’t for everyone, so hopefully this will help you decide if one is right for you.

Rather get an installment loan rather than a cash advance? With Possible, you can borrow up to $500 in minutes without a credit check and build credit history.  

How Cash Advances Work 

With your credit card, you have a line of credit. This basically means you can only use so much money on your credit card each month. For example, if your line of credit is $4,000 per month, your credit limit caps you from spending over that $4,000. When taking out a cash advance, your credit card issuer usually won’t let you borrow the full amount of your credit. Instead, your cash advance limit might be a few hundred dollars.  

Here’s an example of how these cash advances work: If you wanted to buy some furniture you found online for $200 but you only have $50 in your bank account, you could take out a cash advance for the $150 more you need. Unfortunately, as soon as you take the cash advance out interest on it will begin to add up. You will have to pay back the amount of the withdrawal, the interest, and any other fees that come with it. If you wait too long to pay your credit card company back, the interest can end up making the cash advance quite expensive.The average interest or “APR” for cash advances is almost always more than the APR for your normal credit card. Cash advance APRs can reach 36% but usually are about 2% higher than credit card APRs.

The best alternative to a traditional cash advance

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How to Take Out a Cash Advance 

There are a few different ways you can take out a cash advance. Some institutions allow you to take out a cash advance online, but the three most common ways are from an ATM, going to your bank branch, or by writing a cash advance check. 

ATM

Getting a cash advance from an ATM is not much different than if you were normally withdrawing money. At your ATM, just enter the credit card you use. You will then be asked to put in your PIN. This PIN number is not the same one as your debit card. The PIN for cash advances is given to you by your credit card issuer, not your bank. If you don’t have this number or you are unsure what it is, you can call your credit card company and they will give it to you. 

Need your money right away? Getting your PIN can take more than one day, so this might not be the option for you. ATMs also might cap you at a certain limit versus some of the other options. ATMs also charge small fees when using them. 

Going to your Bank

If your bank offers cash advances, you can take one out right at your branch. To take one out here you will need your credit card and some form of government issued ID like your drivers license or passport. That’s it!

Cash Advance Check

Your credit card issuer may give you blank checks to write your cash advances on. If not, you’ll need to call your credit card company and request them. Using your bank, you can write these checks to yourself to take out a cash advance. If you cash your checks in person, you can walk out with cash or deposit it right away. If you cash your checks online, it might take some time to process but it should be deposited in your bank account after some time. 

Why Cash Advances Are Expensive 

With all the additional fees and interest that comes with these cash advances, they can become unaffordable for some people. If the fees and interest are large enough, a cash advance of $500 could end up costing you somewhere near $600. Before you take one out, make sure you are able to handle these additional costs. Here’s what makes these cash advances so expensive.

Cash Advance Fees

A cash advance fee is just what it sounds like. It’s a fee your credit card company will charge you just for taking a cash advance out. Depending on how your credit card company charges you, these fees can vary. The first way they might charge you is by a percentage of the amount you withdraw. If you withdraw $300, they might charge you a fee of 5% which comes to $15. Second, they may just charge you a flat fee that doesn’t change no matter how much you withdraw. This fee is usually $10 or so. The third and most typical way they can charge you is a combination of the percentage and flat fee. With this method the company charges you the higher amount between the two. If the fee percentage was 3% but the flat fee was $10 and you withdrew $100, your fee would be $10. 

Interest

Of the additional costs of a cash advance,  the interest you get charged can often end up being the most expensive. This interest rate is usually more than your credit card issuer would charge you for purchases. Likewise, the interest begins immediately after your withdrawal instead of giving you the grace period you would normally get with credit card purchases. 

The interest rates or APR that is charged for cash advances are relatively high, and if you are already down on money this additional expense can be very tough. These expenses are the real heavy hitter that could make a cash advance not worth it. The average cash advance APR being around 21%. That can really add up! If you are set on getting a cash advance, make sure you can live with the high interest rates.

ATM/Bank Fees

The smallest of the cash advance costs, ATM and bank fees are expenses you must pay for using the ATM or the bank's services. You have probably already seen these fees before. This fee is usually about $2.50 but can vary depending on the ATM or bank. 

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Pros and Cons of Cash Advances

You’ve heard what cash advances are and what to expect when getting one, but are you still unsure if you should get a cash advance loan? Let’s look at some of the pros and cons to help you make a decision. 

Pros

Compared to other small loans, cash advances are relatively fast. If you are in a jam and desperately need money soon, a cash advance can be one of the quickest financing options. Being able to walk out of the bank with the cash you need or have it in your account after a few days is a great advantage. Similarly, receiving these are not very difficult either. Taking a trip to your bank or an ATM is not much of a hassle. 

If you were to get a small loan at a bank, your credit would be analyzed and you might have to put some of your assets up to serve as collateral. They may look at your FICO credit score to determine whether they should loan to you or not. This credit score includes your payment history, lines of credit, amount of credit, length of your credit used and the types of credit you get. With a cash advance, your credit line with your credit card company is used instead of your personal assets. This can be important if you are to fail to repay your cash advance. Additionally, you do not need a great credit score to take out a cash advance.

Cons

The additional costs to cash advances alone are a good enough reason to not use them. You could be taking out a cash advance and end up paying an additional $100 just to pay it off. The interest rates are cranked up for these loans and could make it very hard to pay back everything you owe. 

This isn’t the only problem with cash advances, though. Cash advances can put you in a bigger hole than you were to start. If you are living paycheck to paycheck and you need to take out a cash advance, chances are you are going to be stretched very thin to pay everything back because of the high costs. Cash advances might be a short term solution to fix your financial problems but it might set you up to be in even more trouble down the road. Failing to pay back the hefty costs can hurt your credit score as well. Cash advance is a fast solution, but other financing options provide much less risk. 

Alternatives to Cash Advances

Don’t think cash advances aren’t right for you? You might be right. Cash advances are definitely not for everyone who is in need of fast money. There are many alternatives to cash advances that are less risky and can be just as fast. 

Payday Loan Alternatives

We at Possible think of ourselves as an alternative to a traditional payday loan. Typical payday loans are paid back all at once, which can be very difficult to pay off. Likewise, they don’t help to build up your credit. APRs can also be through the roof. 

How are we any different you might ask? In contrast to these traditional payday loans, we allow customers to pay back their loan over multiple, more manageable, payments. We also have the flexibility for you to reschedule payments right in the Possible app. Paying back our loans also helps to build your credit over time. We are also proud of our lower APR compared to many of these other payday loans. 

Borrowing Money

Borrowing money from your family and friends can be a good alternative to getting a cash advance. According to the Federal Reserve, loans from family or friends add up to about $89 billion in the U.S. every single year. Family and friends are more likely to be forgiving about your repayments. Likewise, you won’t get the same gigantic fees and interest you have with cash advances. You might not even be charged interest at all. 

Despite these things, there’s a chance your friends and family don’t have hundreds of dollars to spare that they can loan you. Loaning you money could put great financial strain on them and it could get even worse if you can’t pay them back. Be aware that failing to pay back your friends or family can have serious consequences on your relationship with them. 

Overdrawing Your Checking Account

Depending on your bank and their policies, you may be able to overdraw your account. If you had $50 in your bank account, overdrawing would be the ability to spend $100 and let your account balance fall to -$50 instead of stopping you at $0. Overdrawing can be an alternative to cash advances, especially if you only need a small amount of cash. However, your bank will charge you overdrafting fees. These fees may be on each additional transaction after overdrawing, or it could be a daily fee each day you’re negative. Depending on your situation, overdrafting fees could cost less than a cash advance. 

Final Thoughts

Cash advances can serve as a quick solution for you if you need cash quickly. However, cash advances come with many negatives that should make you think twice about getting one. There are alternatives to cash advances that are just as easy and more safe. Because of this, cash advances are probably not your best bet. 

Do you need money but don’t want a cash advance? A payday loan alternative at Possible could be your answer. Download the app on our website or find us on the App Store!

Michael Collins

Michael has a passion for writing and has since brought that passion to Possible. He enjoys reading everything there is to know about film, sports, and finance. His studies in college allow him to be on the forefront of business knowledge so he can better inform his readers.

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