Cash Advances Meaning

Understand the meaning and impact of cash advances and apply online with zaving.

Last updated by Zaving Editorial Team, on May 13th, 2024

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What is the meaning of cash advances and how do they work?

Cash advances, provided by credit card issuers or specific financial institutions, function as short-term borrowing options that permit cardholders to access cash against their credit limit, often obtained via ATMs or bank withdrawals. This process typically incurs immediate interest charges, usually at rates higher than those associated with standard credit card purchases.

When opting for a cash advance, you're essentially borrowing against the available balance on your credit card. In contrast to regular credit card transactions that might offer a grace period before interest applies, cash advances often start accumulating interest right from the moment you withdraw cash. The amount you can withdraw depends on your credit limit and the specific cash advance limit established by your card issuer.

Additionally, cash advances often encompass supplementary fees, encompassing ATM charges, cash advance fees (typically a percentage of the withdrawn amount), and potentially elevated interest rates compared to regular credit card transactions.

Understanding that cash advances are generally seen as expensive alternatives due to their higher fees and immediate interest accumulation, it's prudent to use them judiciously and primarily for urgent needs, considering their higher costs relative to other borrowing avenues.”

How are cash advances different to payday loans?

Cash advances and payday loans present distinct differences:

  • Funding source: Cash advances are typically tied to credit cards, allowing users to withdraw cash against their card's credit limit. Conversely, payday loans are short-term loans issued by specialized lenders, often based on the borrower's income.
  • Repayment structure: Cash advances are usually repaid as part of the credit card balance, commonly on a monthly basis, subject to the card's terms and interest rates. In contrast, payday loans necessitate a lump-sum repayment, covering principal, fees, and higher interest, typically due on the borrower's upcoming payday.
  • Interest rates and fees: While cash advances tend to carry higher interest rates than standard credit card purchases (around 25% to 30% APR), payday loans often come with significantly elevated rates, frequently surpassing 400% APR, along with additional fees.
  • Regulatory oversight: Cash advances adhere to credit card regulations and agreements, whereas payday loans are regulated by specific state and federal guidelines, often with variations distinct from credit card regulations.

These distinctions in funding sources, repayment structures, interest rates, fees, and regulatory oversight highlight the divergent nature of cash advances and payday loans, impacting their suitability based on individual financial circumstances and needs.”

Can cash advances affect my credit score?

Yes, cash advances can impact your credit score indirectly. 

While they aren't reported as separate entries, several aspects surrounding cash advances can influence your creditworthiness:

  • Credit utilization: Cash advances add to your outstanding credit card balance, affecting your credit utilization ratio. Higher ratios might lower your credit score.
  • Late oayments or defaults: Missing payments or defaulting on cash advances can lead to late fees and negative entries on your credit report, potentially reducing your score.
  • Accrued debt: Cash advances often come with high fees and interest rates, contributing to increased debt. Accumulating significant debt can indicate financial instability, indirectly impacting your creditworthiness.
  • Credit history impact: Lenders review your credit history, considering credit account types and payment behaviors. Heavy reliance on cash advances may suggest financial challenges, affecting your creditworthiness.

To minimize negative impacts, use cash advances responsibly, pay balances promptly, and avoid missed payments. Regularly monitor your credit report for any errors. Responsible use and maintaining good credit habits can mitigate the impact of cash advances on your credit score.”

More of your frequently asked questions about payday loans

Are there restrictions on how I can use a cash advance?

Restrictions on cash advance usage are common and can differ between lenders. These limitations often involve capped withdrawal amounts, frequently tied to a percentage of your credit limit, and prohibitions on specific activities like gambling or investments. It's prudent to use cash advances primarily for immediate financial necessities due to their higher fees.

Can I get a cash advance if I have bad credit?

Yes, it's possible to obtain a cash advance despite having bad credit, although it might require extra effort. Some lenders might still extend cash advances to those with poor credit, but they could apply stricter terms, lower limits, or higher fees. Consider alternative lending sources, like payday loans, but be mindful of their higher associated costs.

Can I pay off a cash advance early without penalties?

Whether you can settle a cash advance early without penalties depends on your lender's guidelines. While some lenders permit early repayment without penalties, offering the chance to decrease interest expenses by paying off the advance sooner, others may enforce prepayment fees. Reviewing your agreement or contacting your lender will clarify if settling the advance early incurs extra charges.

What are the rates and fees associated with cash advances?

Cash advances come with escalated fees and elevated interest rates compared to standard credit card purchases. Typically, you'll encounter an initial fee ranging between 3-5% of the withdrawn amount, coupled with interest rates spanning from 25-30% APR, contingent upon your creditworthiness and the specific lender. It's imperative to comprehend that these collective charges can swiftly mount, rendering cash advances a notably expensive route.