Cash Advances: What You Need to Know

A cash advance is a short-term loan offered by lenders, such as a bank or your credit card issuer. Unlike typical personal loans, you don't need to undergo a rigorous application process because the money doesn't come from the bank. Instead, you'll borrow it against an existing credit line.

A cash advance is something to consider if you’re short on funds and looking for options. However, watch out for the interest rates when getting a cash advance. They are usually high and can make repayment more difficult in the long run.

Sometimes, you’ll find yourself needing funds fast. In these circumstances, you would usually consider getting a cash advance. It’s a quick way for credit card holders to cover unexpected costs.

Since you're borrowing against your line of credit, you don't need to complete another application. The amount you can borrow varies between issuers, but it usually ranges from 20% to 30% of your credit line. At most, 50%.

As with any loan, you must pay interest for a cash advance, which is usually higher than your rate for credit card purchases. You may also have to pay a transaction fee.

Knowing how a cash advance is different from a typical loan is crucial. When you borrow from a bank, you usually have the option to choose or negotiate your repayment terms.

A cash advance works differently. For example, the APR for regular purchases using Chase’s Sapphire Preferred is between 18.24% to 25.24%, depending on your credit score. However, the rate for cash advances is 27.24%, no matter how creditworthy you are.

Besides the interest rate, you’ll also be working with a shorter repayment period and possible transaction fees.

Most credit cards offer a cash advance option, making it convenient when you need emergency funds. A cash advance may share similarities with different types of personal loans, but it’s crucial to know the elements that set it apart.

Despite the characteristics that make it attractive to consumers, understanding how interest rates, loan terms and fees apply can help clarify the terms of a cash advance. They all affect you when managing your finances.

The short answer is yes. A cash advance might affect your credit score. Although it won't reflect on your credit report, a cash advance may influence some factors that make up your credit score.

First is your credit utilization ratio, which indicates how much of your available credit you've used. When you make a cash advance, the money doesn't come from your account or bank. Instead, it comes from your existing credit line. As a result, borrowing from your credit line will increase your ratio.

Typically, it's best to keep your credit utilization below 30%. Anything above that may cause your credit score to drop.

A credit advance may also affect your payment history, which makes up 35% of your score. Keep in mind that paying back your cash advance can be challenging because of the more expensive interest rates.

Late or missed payments can affect your credit score significantly and lower it.

Besides understanding how a cash advance works, knowing where to get one is another important consideration. There’s more than one way to obtain a cash advance, which is attractive to consumers. It's a convenient option if you need money immediately.

You have the option to secure a cash advance from a bank or an ATM, or you can use convenience checks. Regardless of your preferred channel, it's all from your credit line.

Besides understanding what a cash advance is and how it works, ultimately, you must decide whether it’s the right move for you. MoneyGeek compiled its advantages and disadvantages to give you a better idea. Despite the benefits of a cash advance, it also has its drawbacks.

No one's saying that you should never take advantage of your credit card's cash advance option. Remember, it does have benefits — especially if you need cash immediately.

However, being aware of the high APRs and additional fees can help you manage your finances better. A cash advance is a quick solution in an emergency, but you might want to reconsider this option if borrowing regularly.

A clear understanding of how cash advances work allows you to gauge whether or not it's the right move for you.

A cash advance through your credit card may be the most common form, but other types of cash advances are available. However, it's best to remember that regardless of which one you use, you will still encounter expensive interest rates and several fees.

Opening a business — even a modest one — is no small feat. As with any other business venture, you must have the capital to begin. Unfortunately, small business owners often find the loan requirements of a traditional bank challenging to meet.

An alternative funding source is microfinance, which allows you to borrow a small amount — often less than $1,000 — to start. Combine this with present-day technology, and you get microfinancing apps such as Tala, Kiva and Accion.

The objective of microfinance is for borrowers to outgrow these types of loans and eventually qualify for the more traditional ones offered by banks and other lenders.

Payday loans allow you to borrow funds — usually below $500 — with short terms and high-interest rates. The amount typically depends on your income, so you’ll have to present a pay stub when you apply.

Fortunately, there aren't any other requirements. Lenders don't check your capability to repay the loan, which puts them at risk. However, as a result, they charge extremely high-interest rates. Typically, you must repay your loan within 30 days.

Not all states allow payday loans. Eighteen states and the District of Columbia have laws that prohibit them.

A Merchant Cash Advance (MCA) is an alternative funding source for small business owners. A lender gives you a lump sum, but it isn't a loan. Instead, they're purchasing future sales.

Although lenders look at your credit score, they're more willing to approve your application, even if it's less than ideal. You'll sign an agreement containing the advance amount, which depends on your business's daily credit card transactions.

As a result, you'll use a percentage of your sales over time to repay the payback amount. That’s the advance amount plus a fee, which is called a factor.

There's more to cash advances than what makes them attractive to borrowers. It’s advisable to understand how they work. That said, they can be confusing. MoneyGeek answered some commonly asked questions for your research.

Cash advances are only a part of a broader financial structure on loans and credit cards. Here are several online resources to help you in your evaluation of borrowing and credit.

• Balance Transfer vs. Cash Advance: What’s the Difference?: Cash advance is one of the terms you typically encounter when using a credit card. A balance transfer is another. This page compares and contrasts the two.
• Merchant Cash Advance for Business: MoneyGeek’s page dives deeper into how a Merchant Cash Advance works. You can evaluate its advantages and disadvantages using this page.
• How Credit Cards Work: A credit card is a major financial responsibility, especially if it’s your first. MoneyGeek’s page walks you through the essentials — from applying for one to making payments.
• How Does Credit Card Interest Work?: One of the things you must always watch out for when using a credit card is its interest rate. Learn how to calculate it and the ways to avoid accumulating interest.
• What Personal Loan Types Should You Avoid?: Cash advances may have benefits, but they can also be something to avoid. MoneyGeek’s page explains why.