When faced with unexpected expenses or financial emergencies, you may look at two financing options: cash advances and personal loans. While both can provide short-term funding, each loan type has distinct differences that can impact your personal finances.
In this blog, we’ll explain the differences between cash advances and personal loans, and we’ll explore how they work.
Cash Advance vs. Personal Loan — What’s the Difference?
A cash advance is a type of loan usually offered by credit card companies. All you need is a credit card to withdraw funds against your available credit line.
Personal loans also provide short-term funding, but they don’t involve a credit card. Instead, personal loans require you to apply for a specific amount of funding.
Payday loans are also sometimes referred to as a “cash advance,” and there are “cash advance” apps as well. These types of funding are different from credit card cash advances.
How Do Personal Loans Work?
A personal loan provides a lump sum of cash that is repaid in fixed installments over an agreed-upon term. The interest rate on personal loans can be fixed or variable, depending on the lender and loan terms.
Personal loans can be either secured or unsecured. Secured personal loans require collateral, such as a car or property, which can be taken by the lender if the borrower defaults. Unsecured loans, on the other hand, don’t require collateral and are approved based on the borrower’s creditworthiness and income.
Application. To determine your eligibility for this type of loan, lenders will usually look at a number of factors. Applying for a personal loan usually involves a credit check, income verification, and other documentation to assess your creditworthiness.
Funding. If approved, you’ll receive the loan amount as a lump sum in your bank account, usually a checking account.
Repayment. Repayment occurs over the loan term, generally with fixed monthly payments that include both the loan principal and interest.
Benefits of a personal loan
Predictable payments. With fixed interest rates and a predetermined repayment schedule, personal loans offer predictable monthly payments. This predictability can help you plan your budget more effectively and avoid surprises.
Longer repayment terms. Personal loans allow you to pay interest over a period of time, spreading out your payments over several months or years. This can help ease the burden of repayment and make it more manageable, especially for larger loan amounts.
Potentially lower interest rates. Personal loans often have lower interest rates than credit cards, making them a more cost-effective borrowing option for individuals with good credit scores. This can lead to significant savings over the life of the loan.
Disadvantages of a personal loan
Approval might take longer. Approval times for personal loans and credit card cash advances can vary depending on the lender, your creditworthiness and other factors. However, personal loans tend to have longer approval processes than credit card cash advances.
Specific eligibility criteria. Lenders often have specific eligibility criteria for personal loans, including minimum credit scores, income requirements and debt-to-income ratios. If you have bad credit or a spotty credit report, or if you don’t meet other criteria, you might not qualify for the loan.
Origination fees. Some lenders charge origination fees, which are upfront fees that cover the cost of processing the loan. These fees can add to the overall cost of the loan and reduce the amount of funds you receive.
How Does a Credit Card Cash Advance Work?
Credit card cash advances allow you to withdraw cash from your credit card’s available credit line. This option is particularly useful when you need immediate funds, but cash advances often come with higher interest rates and additional fees compared to regular credit card purchases.
Application. You can request a credit card cash advance through your credit card issuer, in-person at a bank, at an ATM or with a convenience check.
Funding. The requested cash is provided to you, usually in the form of physical currency or a deposit into your bank account.
Repayment. Cash advances typically have a shorter repayment period and are subject to higher interest rates than regular credit card balances.
Benefits of a credit card cash advance
Quick access to funds. One of the primary benefits of a credit card cash advance is the speed at which you can access funds. If you’re in an emergency situation or need immediate cash, a cash advance allows you to access money from your credit card’s available credit line without spending time on an application.
No application process. Unlike personal loans, which require a separate application and approval process, a credit card cash advance doesn’t require filling out additional forms. You can use your existing credit card for the cash advance.
No fixed repayment schedule. While credit card cash advances do come with repayment requirements, they don’t usually have fixed monthly payments like personal loans. Instead, you’ll have a minimum payment due on your credit card statement each month, giving you more flexibility in managing your repayment.
Disadvantages of a credit card cash advance
High interest rates and fees. One of the biggest disadvantages of credit card cash advances is the high interest rates associated with them, typically higher than the rates for regular credit card purchases. Additionally, your issuer may charge a cash advance fee.
Short repayment period. Another significant disadvantage of credit card cash advances is their short repayment period. When you get a cash advance, you’re often required to repay the borrowed amount within a relatively short time frame.
Impact on credit. Applying for a credit card cash advance could result in a hard inquiry on your credit report, potentially lowering your credit score. Additionally, if you struggle to repay the cash advance on time, it could further negatively impact your credit history. Using a credit card for a cash advance can increase your credit card balance and impact your credit utilization ratio, which can negatively affect your credit score.
Is a Credit Card Cash Advance or a Personal Loan Better?
The choice between a cash advance loan and a personal loan depends on your specific financial needs and circumstances. If you need a relatively small amount of money for a short period, a cash advance might be a viable option due to its quick accessibility.
However, if you require a larger sum and prefer longer repayment terms with lower interest rates, a personal loan is likely the better choice. It’s important to consider the associated costs and repayment terms carefully before making a decision.
What Is a Payday Loan Cash Advance?
Payday loans are considered a cash advance, but they come with significant risks due to their high costs and short repayment periods.
Unlike personal loans, which are repaid over a longer period of time, payday loans are designed to be repaid from your next paycheck or on your next payday. Payday loans also differ from credit card cash advances, since they’re borrowed from specialized lenders instead of credit card issuers.
The interest rates and fees charged by payday lenders can be extremely high. This can trap borrowers in a cycle of debt where they struggle to cover the loan and end up taking out new loans to meet their immediate expenses. In some states, payday loans are restricted or even banned.
Are There Alternative Borrowing Options?
Beyond cash advances and personal loans, several alternative borrowing options are worth exploring.
Line of credit. While a credit card cash advance involves withdrawing cash directly from your card’s available credit line, a line of credit provides you with access to a predetermined credit limit that you can borrow from as needed.
Financial assistance programs. If you need to cover expenses such as rent or utility bills, there are government assistance programs that may be able to help.
Borrowing from family or friends. If possible, borrowing from loved ones might offer more flexible terms and lower interest rates. You can write out a repayment schedule and terms to agree upon. But be careful — irresponsible borrowing can put a strain on the relationship.
DISCLAIMER: This content is for educational and informational purposes only, and is not intended as financial, investment, or legal advice. You should conduct your own research and seek the advice of a licensed professional who can address the specifics of your situation.