It can be incredibly stressful when you need money but don’t have it readily available. Perhaps you need money to cover a car repair. Maybe you’re dealing with some unexpected out-of-pocket medical expenses. Whatever the reason, these financial needs happen. And what are you supposed to do when you need money fast?
In some cases, you may be able to borrow money from a family member or friend. If you have a good credit score, you might be able to take out a loan. But what happens when you don’t have a good credit score?
For those with less-than-stellar credit, typically a score of 600 or below, it may have you considering a cash advance or a payday loan. In this article, we’ll explain what both options are, how they work, and the cost considerations that you need to keep in mind.
What is a Credit Card Cash Advance?
One of the easiest and fastest ways to get quick cash is to take out a cash advance from your credit card. Of course, this option requires a credit card, and your current credit card utilization can’t be maxed out. Basically, if you have a credit card with a $10,000 credit limit and you currently owe $9,800, you have almost maxed out your utilization, so this isn’t an option.
However, if your balance isn’t close to your limit, a cash advance may be an option. A cash advance allows you to access cash using your credit card’s available credit. Depending on your card issuer, you may be able to withdraw the money from an ATM or bank, transfer funds to an eligible account, or use a convenience check.
While a credit card cash advance can provide quick access to money when you’re short on funds, it can be a costly form of borrowing. You may have to pay a cash advance fee, and interest typically starts accruing right away at an APR that may be higher than the rate charged on regular purchases.
What is a Payday Loan?
If you don’t have a credit card, don’t have enough available credit for a cash advance, or need another way to access money quickly, a payday loan may seem like an option. Payday loans are designed for short-term needs. That said, it is a high-cost loan that is usually for $500 or less and is typically due by your next payday. Unlike a credit card cash advance, a payday loan is a separate loan that you obtain directly from a payday lender.
According to the National Conference of State Legislatures, 37 states have specific statutes that allow payday lending, while other states prohibit these loans or restrict them through their consumer lending laws. Before considering a payday loan, check your state’s current laws and regulations.
Cash Advance vs. Payday Loan: Key Differences
Though both a cash advance and a payday loan can help you get access to money fast, there are some big differences that you should be aware of. We’ve provided a table below to help you compare the two and decide what might be best for your financial needs.
| Feature | Credit Card Cash Advance | Payday Loan |
| Where the money comes from | Funds are borrowed against the available cash advance limit on your credit card. | Funds are borrowed directly from a payday lender. |
| Typical borrowing amount | The amount you can borrow depends on your card issuer and available cash advance limit. | Typically $500 or less, although limits vary by lender and state law. |
| How you get the money | Depending on the issuer, you may withdraw cash at an ATM or bank, use a convenience check, or transfer funds to an eligible account. | Depending on the lender, you may apply online or at a storefront location and receive the funds electronically or through another available payment method. |
| Eligibility | You generally need a credit card with sufficient available cash advance credit. | Requirements vary, but lenders generally require a source of income and may require access to a checking account. |
| Cost | May include a cash advance fee, ATM fee and interest that typically begins accruing immediately. | Usually involves a finance charge or borrowing fee that can make the loan expensive relative to the amount borrowed. |
| Interest/APR | The cash advance APR may be higher than the APR charged on purchases, and there is typically no grace period. | Payday loans can carry very high APRs when their short-term fees are expressed as an annual percentage rate. |
| Repayment | The advance becomes part of your credit card balance and is repaid according to your card agreement. | The full amount borrowed plus applicable fees is typically due on your next payday or within another short repayment period. |
| Availability | Available to eligible cardholders when their issuer permits cash advances, and they have available cash advance credit. | Availability depends on state law. Some states permit payday lending, while others prohibit or significantly restrict it. |
How Much Does a Cash Advance Cost?
A cash advance doesn’t come at no incremental cost to the borrower. Unless your credit card issuer is offering a special promotion, you will most likely be charged a fee of 3% to 5% in addition to the amount you take out.
For example, let’s assume you have a credit card with a $6,000 credit limit and your current balance is $3,000 (50% utilization). And, let’s say you need to borrow $500. In this case, you can expect to be charged somewhere between $15 and $25 to take out the cash advance.
This fee is in addition to the interest you will pay on what you borrow if you can’t pay it back before your next bill is due. Considering that the average interest rate on a credit card sits somewhere between 22.15% and 24.96%, you can suddenly start to owe a lot more than you planned on.
How Much Does a Payday Loan Cost?
Payday loans are sometimes marketed as a way to cover emergency expenses or make ends meet until your next paycheck. While they can provide quick access to cash and may have less stringent credit requirements than some traditional loans, that convenience can come at a high cost.
Payday lenders typically charge a fee for every $100 that you borrow rather than quoting a traditional interest rate. Fees commonly range from about $10 to $30 per $100 borrowed, depending on the lender and applicable state law. Because payday loans have very short repayment periods, these fees can translate into extremely high annual percentage rates (APRs).
For example, a typical two-week payday loan that charges $15 for every $100 borrowed works out to an APR of nearly 391%. Some payday loans can carry even higher APRs, depending on the fees and repayment period.
To put the cost into perspective, suppose you borrow $500 with a fee of $15 per $100. You would pay $75 in fees, bringing the total amount due to $575, typically within about two weeks. If you can’t repay the loan when it comes due, additional fees or finance charges may apply if your state allows the loan to be renewed or rolled over.
Payday loans can therefore become particularly costly when borrowers have difficulty repaying them on time. Before taking one out, review the total repayment amount, fees, and APR, and consider whether a lower-cost borrowing option is available.
Cash Advance vs. Payday Loan: Which Should You Choose?
Both cash advances and payday loans can be expensive, so consider lower-cost alternatives first. If you have a credit card with available cash advance credit, a cash advance can provide fast funding. However, fees and interest that typically start accruing immediately can make it costly.
If you don’t have a credit card and borrowing from a family member or friend isn’t an option, a payday loan may be an option. But it’s important to educate yourself about the high fees and short repayment periods that come with these loan options. Plus, payday loans aren’t available everywhere, so if you live in one of the 13 states that don’t permit these types of loans, this option might be off the table. That said, consider whether repaying the loan by your next payday would leave you struggling to cover rent, groceries, or other necessities. If so, it may be worth reaching out to a credit counselor for guidance.
Before choosing either option, look at the following:
- Fees
- APR
- Repayment terms
- Total amount you’ll owe
Also consider alternatives such as a personal loan, a payment plan with a creditor, or other financial assistance. Make the best decision for you that will help you get the money you need quickly without putting you in a worse financial situation overall.
