When emergencies pop up and you need cash, you may consider a cash advance or payday loan. Both options provide short-term funding that can help you handle the costs, but there are some major differences in the way these loans work.
Whenever you take out a loan, it’s important to consider all the factors that may impact your decision. Think about things such as how fast you need the money, how much you need, how long it will take you to pay it back, and what fees and interest rates may come attached to each loan.
Making the right financial decisions can be complicated. Here’s what you should think about when deciding between cash advance or a payday loan.
What Is the Difference Between a Cash Advance and a Payday Loan?
Cash advances and payday loans are both short-term loans designed to give borrowers quick access to funds. They can be appealing to borrowers with bad credit because they often don’t require a hard credit check and the application process is simple. They have some big differences including who provides the loan, how long you have to pay it back, and what type of fees and interest rates are attached.
The term “cash advance” can refer to many types of loans. In some cases, a “cash advance” may even be used to refer to a payday loan. When comparing payday loans and cash advances, many borrowers are thinking of either credit card cash advances or cash advance apps. All of these types of loans — credit card cash advances, cash advance apps and payday loans — can come with a high cost of borrowing or high interest rates. You should carefully consider all of your options before deciding whether these are the best options for you.
What Is a Cash Advance?
A cash advance can come from your credit card issuer or a cash advance app. Though they share a name, these two types of loan function a little differently from one another.
Credit card cash advance. If you choose to take a credit card cash advance, you’ll be allowed to withdraw up to a certain limit — usually a percentage of your card’s credit limit. This type of transaction may have a higher interest rate than your credit card or additional fees. The repayment terms will be outlined by your credit card company and likely won’t be tied to your next payday.
Cash advance app. You can also use a cash advance app. These applications allow you to borrow small loan amounts and repay them either on your next payday or another agreed upon due date. Often these apps charge you fees or subscription rates on top of your repayment.
What Is a Payday Loan?
A payday loan is a small, personal loan that’s usually meant to be repaid in full with the borrower’s next paycheck. These short-term loans can come with high finance charges which can make these types of loans expensive and difficult to repay. You can find payday lenders in-store or online. They typically don’t check your credit score, though they may ask you to provide proof of identity and proof of income. You may also need to provide either a post-dated check or access to your bank account for repayment.
Pros and Cons of a Payday Loan vs. a Cash Advance
Pros of a Payday Loan
- Quick access to cash. Payday loans can provide borrowers with fast cash in an emergency.
- No credit check. Payday lenders don’t usually check credit scores, this means that borrowers with bad credit or no credit history can still be approved.
- No collateral required. Payday loans are a type of unsecured loan, meaning you don’t need to hand over your car title or other valuables in order to secure the loan.
- Easy application. Applying for a payday loan is easy. You typically only need proof of identity, proof of income and an active checking account.
Cons of a Payday Loan
- High interest rates and short term lengths. Payday loans often have an APR of 400% or more. High annual percentage rates combined with short (typically two-week) terms can make it hard for borrowers to afford repayment because they usually need to be rapid in full. This can cause borrowers to roll over the loan or borrow more in order to pay off the previous loan. It makes it easy for borrowers to become trapped in a cycle of debt.
- Limited loan amounts. Payday loans often only provide small loan amounts of a few hundred dollars. The amount you are able to borrow through a payday loan depends on state and local law, but if you have a bigger expense you may not be able to borrow enough though a payday loan.
- Hidden fees. Payday lenders will often have other fees associated with borrowing. These could include origination fees or early repayment fees. All these fees increase the cost of borrowing.
- Lack of regulation. In states that allow payday lending, there has been some criticism about the lack of regulation. The Consumer Financial Protection Bureau (CFPB) was established to help protect consumers from predatory lending practices, but the level of effectiveness and regulation can vary depending on where you are.
Pros of Cash Advances
- Easy access to funds. Cash advances are typically easily obtained through your credit card issuer or cash advance app. With a credit card cash advance you can often get a cash advance from an ATM or a branch of your bank — as long as you have enough available credit. A cash advance app lets you apply and receive funds straight from your phone.
- No credit check. If you’re getting a cash advance through your credit card, you’ve already been approved to borrow so there’s no need to run a credit check. Cash advance apps typically don’t run a hard credit check either.
- More flexible repayment options. Though it will depend on your specific terms, with a cash advance you may be able to get more flexible repayment options than a payday loan.
- Lower interest rates and fees. A credit card cash advance will often have a lower interest rate than a payday loan.
Cons of Cash Advances
- High cost of borrowing. While credit card cash advances can have lower interest rates compared to a payday loan, they often still have high interest rates. If you’re using an app you may have to pay a subscription fee for using the service.
- Limited loan amounts. You can typically only borrow a percentage of your credit limit with a credit card cash advance. With the cash advance apps, you often have to use the service multiple times to be able to borrow higher amounts, but they still may not offer as much as a traditional loan.
- Lack of consumer protection. When you use a credit card you have certain protections like chargeback rights. You may not get the same level of protection when using a cash advance.
- Risk of overuse. Having access to easy cash advances can give you a false sense of security that you have extra funds. This can lead to overspending and worsen your financial situation.
Are There Alternatives to Payday Loans and Cash Advances?
There are other loan options available for borrowers looking for funding. Depending on your unique financial situation, one of these options may be a better fit for you. When considering a high-interest loan, you should consider all of your options before deciding.
Check with your financial institution. You may be eligible to get a loan through your bank or credit union. They typically will do a hard credit check, meaning it could be harder to meet the eligibility requirements. They also report repayment history to the credit bureaus so on-time payments could help build your score. These loans will often come with lower interest rates and better terms.
Installment loans. An installment loan provides borrowers with a lump sum of cash that they pay back in smaller chunks (or installments) over time. These types of loans are often available through online lenders and have an easy application process and less stringent requirement than a bank or credit union. You could receive your funds fast and by spreading out repayment over multiple bi-weekly or monthly payments it could be easier to fit into your budget.
Lines of credit. A line of credit is a form of revolving credit. If you’re approved, you’ll get access to funds you can tap whenever you need cash, up to a certain credit limit. As you repay the funds become available to borrow again. These loans are also available through online lenders, which means you could get your cash fast and it could be easier for borrowers with less-than-perfect credit to be approved. Repayment can also be spread out over a longer period of time. A line of credit could be a good option if you need ongoing access to cash or just need a little bit of buffer to fall back on.
Title loans. A title loan is a secured loan that uses your vehicle as collateral. You’ll get a lump sum of cash that will typically need to be repaid within a short period of time. Be aware that if you fail to repay the loan the lender can seize and sell your car.
DISCLAIMER: This content is for educational and informational purposes only, and is not intended as financial, investment, or legal advice.