November 25, 2024

What is a Cash Advance? How it Works, Types and Fees

In need of a quick cash infusion to handle an emergency or an unexpected bill?

Cash advances can help you solve unforeseen financial problems. But they often come with strings attached, so it’s crucial to understand what you’re getting into.

What is a cash advance?

A credit card cash advance is a transaction where an individual borrows cash against their card's available credit limit. Unlike regular credit card purchases to buy goods or services, a cash advance allows the cardholder to withdraw cash straight from an ATM or bank.

There are other kinds of cash advances, but they all allow quick access to funds, making them appealing in emergency situations.

But cash advances tend to come with higher costs and additional fees compared to regular transactions—usually a percentage of the total amount withdrawn.

On top of those fees, cash advances often carry higher interest rates than regular purchases, and interest begins accruing immediately after the withdrawal, leaving cardholders with less and less time to pay off the balance interest-free.

So, while cash advances can seem like a convenient solution in emergencies, approach them with caution and use them sparingly. Understanding the associated fees and interest rates will help you make more informed financial decisions and avoid unnecessary debt. You might also discover convenient and low-cost alternatives that work much better for you.

Types of cash advances

The most common cash advances include credit card cash advances, merchant cash advances, and payday loans.

1. Credit card cash advances

Credit card cash advances are the most common type of cash advance, allowing cardholders to withdraw cash from their credit card account. This type of cash advance is readily available to anyone with a credit card, making it a convenient option for those who need quick cash.

But these transactions usually come with high fees and interest rates. In other words, they’re usually an expensive option.

2. Merchant cash advances

Merchant cash advances are designed for businesses and work differently from traditional loans. In this type of cash advance, a business owner receives a lump sum in exchange for a portion of their future credit card sales. The advance is repaid by taking a percentage of daily credit card sales until the agreed-upon amount is reached.

Although merchant cash advances offer quick funding for businesses, they can also come with high fees and may not work well for many business types.

3. Payday loans

Payday loans are short-term loans offered by specialized lenders, usually used to cover expenses until the borrower's next paycheck. These loans tend to involve high interest rates and short repayment terms, which can quickly create a cycle of debt. Consumers are right to be wary of these advances, as the debts they incur can be very difficult to escape.

Choosing a type of cash advance

As you decide which type of advance to seek, if any, consider the terms and fees associated with each kind—that is, how much each option will likely cost you in total.

Explore alternative solutions, like emergency savings or personal loans from reputable lenders (or even friends and family). There may be better, cheaper, safer ways to find funds.

How do cash advances work?

Curious about how to get a cash advance? Each type works differently:

Credit card cash advances: Cardholders can use their credit cards to withdraw cash from ATMs, use convenience checks, or receive cash back during purchases. The amount withdrawn is added to the card's outstanding balance. I Interest on cash advances starts accruing immediately on the account with no grace period. And you may pay additional transaction fees.
Merchant cash advances: Business owners can apply online with many providers to receive a lump, upfront sum in exchange for a portion of their future credit card sales.
Payday loans: Borrowers receive a short-term loan and write a post-dated check or authorize an electronic debit for repayment on their next payday. The loan amount, fees, and interest are due in full by the agreed-upon due date. Otherwise, the interest quickly and steadily accrues from there.

Advantages and disadvantages of cash advances

Cash advances can be a lifesaver, but they’re far from free money. Let’s lay out the pros and cons so you can make an informed decision.

Pros:

Quick access to funds: Cash advances let you access cash immediately, making them convenient for emergencies.
No collateral required: Most cash advances, including credit card cash advances and payday loans, don't require collateral, simplifying the application process.
No credit check for some: Payday loans, in particular, may not require a credit check, making them accessible to folks with all kinds of credit histories.

Cons:

High fees and interest: Cash advances often carry significantly higher fees and interest rates than traditional loans.
Short repayment terms: Payday loans and credit card cash advances typically have short repayment periods, which can increase pressure on the borrower.
Debt cycle risk: Frequent reliance on cash advances can create a cycle of debt as borrowers struggle to repay the high-cost advances on time.
Effect on credit score: Failing to repay cash advances on time can bring down your credit score.

To better understand the precise costs of cash advances, let’s review their typical cost structure more closely.

Cash advance costs and fees

How much are cash advance fees? What interest will you be charged, and what other costs may be involved? Let’s explore each factor.

1. Cash advance fee: Credit card cash advances typically come with a one-time cash advance fee, usually a percentage of the withdrawn amount. This fee may range from 3–5% or higher.

2. High interest rates: Besides the initial fee, cash advances also carry significantly higher interest rates than standard loans. Additionally, the annual percentage rate (APR) for cash advances is typically higher than the APR for purchases. The interest has no grace period, it begins accruing immediately after the transaction, leaving borrowers less time to repay the balance before interest charges accumulate.

3. ATM fees: Additional fees may apply when using a credit card to withdraw cash from an ATM. These fees can be imposed by both the credit card issuer and the ATM operator. Remember that even small amounts add up, raising the total cost of your cash advance.

4. Late payment fees: Missing the due date for repayment on a cash advance can result in late payment fees, adding to the overall cost of borrowing and potentially hurting your credit.

5. Overdraft fees: If you’re using a cash advance to cover an overdraft, you may still face overdraft fees from your bank, increasing your overall financial burden.

Cash advance cost example

Imagine you need $500 in cash and you decide to use your credit card for a cash advance. If it took you one month to pay it back, this is a breakdown of the total costs you can expect:

Cash advance fee: As mentioned above, this is often between 3% and 5%. In this case, let's say it's 4%. So, your fee would be $500 * 0.04 = $20. You'll pay this fee upfront.

Interest rate: This is usually higher than the regular purchase APR on your card. Let's assume it's 25%. Interest will start accruing immediately on the $500. At a 25% APR, you'll pay about $0.34 in interest per day, amounting to a total of $10.4 for the month ($500 * (25% / 12)).

In total, by the end of the month, you will need to pay back $530, $500 from the cash advance plus $30 in fees and interest.

Extra considerations for cash advances

Credit card rewards don’t typically extend to cash advances. Some types of cash advances may also be less secure than others. Or they can also require extra signatures and paperwork.

If you have other sources of funding available, cash advances are likely a more expensive option or even the most expensive option. Repayment of payday loans, in particular, is notorious for overwhelming borrowers to the point where many governments consider such lenders predatory.

Alternatives to cash advances

Just because you’re in a pinch now doesn’t mean you have to throw your personal finance goals out the window. Consider these lower-stress, lower-cost options—including EarnIn’s Cash Out tool:

1. Emergency savings: Building and maintaining an emergency fund is a great alternative to cash advances that avoids interest and fees altogether.

2. Personal loans: Traditional personal loans from reputable lenders typically offer lower interest rates and longer repayment terms than cash advances.

3. Credit union loans: Credit unions can offer members more affordable loan options, including short-term loans or lines of credit—great alternatives to cash advances.

4. EarnIn's Cash Out tool: EarnIn's innovative Cash Out tool lets you access your pay before payday without the fees or interest of a cash advance.

With quick, easy access to your pay as you work and no interest, no credit checks, and no mandatory fees—EarnIn's Cash Out tool provides the best of both worlds. If you want to avoid the debt trap of traditional cash advances, EarnIn offers convenient, stress-free access to up to $750 of your pay every pay period.

EarnIn is a first-of-its-kind app that gives you the power of everyday payday, empowering our customers to reach their goals and build financial momentum. All with no credit checks, no interest, and no mandatory fees. Download EarnIn today to sign up.

FAQs

What is a convenience check?

Convenience checks are blank checks you might receive in the mail from your credit card company that allow you to use your available credit. The requested funds then show up as a charge on your credit card statement.

Do Convenience Checks Hurt Your Credit?

Using a convenience check itself won't harm your credit score directly. However, it can indirectly impact your credit if it leads to increased credit utilization. Credit utilization is the amount of credit you're using compared to your total credit limit. A high credit utilization ratio signals a high credit risk and can negatively affect your credit score.

How Much Cash Can I Get with A Cash Advance?

Your cash advance limit determines the amount of cash you can withdraw with a cash advance. This limit is typically lower than your overall credit limit and is specified in your credit card terms.

Disclaimer: Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.