A cash advance allows you to borrow cash against your credit card limit or earned income. A payday loan is a small-dollar, short-term loan typically provided by a specialty lender. Both are fast ways to get cash, but can cost you handsomely.
Still, cash advances and payday loans are an option if you're in a financial jam with limited access to traditional financing, like a personal loan. Here's how to decide which one is right for you.
Here's a quick guide on cash advances and what's important to consider.
The most common way to get a cash advance is at an ATM. You'll visit the ATM, insert your credit card and follow the prompts.
Most of the time, there's a limit of 30% of your credit limit on cash advances. The APR on cash advances also ranges from 20% to 30%, with interest accruing immediately.
You'll also need to pay a separate cash advance fee, which can be 3% to 5% of the borrowed amount.
"Cash advances are more suitable with the borrower who is already enjoying credit cards and can easily repay the money within a short time," said Paul Ferrara, Chartered Investment Manager (CIM®) and senior wealth counselor at Avenue Investment Management. "They are normally emergency investments that are short-term."
Payday loans offer fast funds, but they come with risks -- and benefits too. Here's a look.
A payday loan is a small-dollar, short-term loan designed to help cash-strapped borrowers cover pressing expenses between paychecks. Unlike pawn shop loans, payday loans are unsecured, meaning no collateral is required.
"Payday loans can ... prove to be more attractive to those who lack access to conventional credit, although one should be careful with them," Ferrara said. "Because of their high fees and interest rates, payday loans can put people in a loop of debt, which makes them riskier to use in the long term."
If you're thinking that a cash advance might be your best choice, here's a guide.
You need a credit card to start this process, so if you aren't already a cardholder, you'd need to apply for one.
You'll complete these steps to get cash for a credit card.
If you're thinking of using a cash advance or paycheck advance app, expect the following:
While there's slight variation across lenders, the payday loan process typically involves these steps:
Credit checks aren't required for cash advances or payday loans. However, you typically need at least fair credit to get an unsecured credit card -- and good credit to get more favorable APRs and a higher credit limit.
Generally speaking, you walk into a provider's branch or storefront and walk out with your funds.
"The warning signs to look out [for] when contemplating either of the two loans will be predatory fees, excessive interest rates, and lenders that promote automatic rollovers or extensions," Ferrara said. "It is advisable always to read the fine print and make sure that one is fully aware of the contract terms of the loan."
Cash advances and payday loans are expensive, and neither should be your first funding choice. Still, they are an option if you're under financial duress with limited access to cash.
The chart below breaks down which one is better in select scenarios.
Remember, cash advances and payday loans are easy to get, but also easy to misuse. If you're routinely turning to these financing options, consider taking steps to improve your finances or explore debt relief solutions, such as debt management plans (DMPs) or debt settlement.