A cash advance is a short-term loan from a bank or an alternative lender

What Is a Cash Advance?

The term also refers to a service provided by many credit card issuers allowing cardholders to withdraw a certain amount of cash. Cash advances generally feature steep interest rates and fees, but they are attractive to borrowers because they also feature fast approval and quick funding.

Key Takeaways

• A cash advance is a type of short-term loan, often issued by a credit card company, and usually involving high interest and fees.
• Other types of cash advances include merchant cash advances, which are alternative loans for businesses, and payday loans, which have exorbitantly high rates and are prohibited in many states.
• A credit card cash advance won’t directly hurt your credit score, but it will hurt it indirectly by lifting your outstanding balance and your credit utilization ratio, which is a factor in credit scores.

Types of Cash Advances

There are a variety of cash advances, but the common denominators among all of them are the stiff interest rates and fees.

Credit Card Cash Advances

The most popular type of cash advance is borrowing on a line of credit through a credit card. The money can be withdrawn at an ATM or, depending on the credit card company, from a check that is deposited or cashed at a bank. Credit card cash advances typically carry a high-interest rate, even higher than the rate on regular purchases: You’ll pay an average of 24% – about 9% higher than the average APR for purchases. What’s more, the interest begins to accrue immediately; there is no grace period.

These cash advances usually include a fee as well, either a flat rate or a percentage of the advanced amount. Additionally, if you use an ATM to access the cash, you often are charged a small usage fee.

Along with separate interest rates, credit card cash advances carry a separate balance from credit purchases, but the monthly payment can be applied to both balances. However, if you are only paying the minimum amount due, the card issuer is allowed by federal law to apply it to the balance with the lower interest rate installment loans Utah. As that is invariably the rate for purchases, the cash advance balance can sit and accrue interest at that high rate for months.

In most cases, credit card cash advances do not qualify for no- or low-interest-rate introductory offers. On the plus side, they are quick and easy to obtain.

Merchant Cash Advances

Merchant cash advances refer to loans received by companies or merchants from banks or alternative lenders. Typically, businesses with less-than-perfect credit use cash advances to finance their activities, and in some cases, these advances are paid for with future credit card receipts or with a portion of the funds the business receives from sales in its online account. Rather than using a business’ credit score, alternative lenders often survey its creditworthiness by looking at multiple data points, including how much money the merchant receives through online accounts such as PayPal.

Payday Loans

In consumer lending, the phrase “cash advance” can also refer to payday loans. Issued by special payday lenders, loans can range anywhere from $50 to $1,000, but they come with fees (around $15 per $100 borrowed – or even more in some cases) and interest rates exceeding 100%. Rather than taking into account the borrower’s credit score, the lender determines the amount of the loan based on local state regulations and the size of the applicant’s paycheck. If the loan is approved, the lender hands the borrower cash; if the transaction takes place online, the lender makes an electronic deposit to the borrower’s checking or savings account.