What is a Cash Advance?

If you’ve ever faced an emergency expense without the means to handle it, you likely know how stressful of a situation that can be. Sure, you’ve been told in the past how important it is to have an emergency fund for situations like this, but maybe you’ve mostly avoided having to deal with these sorts of expenses up until this point, so why put some of your hard-earned income towards a fund you’re never going to use?

Well, the truth is that emergencies can strike at any moment, and no matter how careful you are, no one is fully immune to them. The good news is that if you find yourself face-to-face with an emergency expense and you don’t have the savings to take care of it, there still may be other ways for you to get your hands on the funds you need. One of these ways is by leveraging cash advance loans. But this may not be as straightforward of a solution as you’d like.

Today, we’re going to go over what a cash advance actually is, discuss when you should and shouldn’t consider applying for one, and go over a few other important questions surrounding them.

Cash Advance Definition

Broadly speaking, a cash advance is a short-term loan that is typically considered to be of a lower amount, although the exact amount that you could be eligible to receive can depend on a number of variables, like the type of cash advance, the financial institution you’re working with, your credit history, and more.

person inserting a card into an atm machine to take out a cash advance.

You find cash advance loans online or through brick and mortar lenders, depending on the specific type of loan you’re looking for. Regardless, they may be characterized by having a relatively quick application process, and if you’re approved, you may receive your funds in one business day depending on the financial institution. You may even be able to receive your funds the same business day in some cases.

While the process can often be quick, there may be some downsides that tend to come with them. Namely, they’ll often have very high interest rates and fees. Because of this, they shouldn’t be used lightly.

What is a Credit Card Cash Advance?

One of the most common types of cash advance loans is a credit card cash advance. These allow you to use your credit card to withdraw cash from an ATM. They typically come with higher interest rates than what you’d pay on regular credit card purchases and you may also be charged an additional fee. It could come in the form of a flat rate or a percentage that’s based on how much money you’ve drawn.

Another important thing to keep in mind is that when you take a cash advance from your credit card, the interest will typically start to build right away. This works differently than normal credit card purchases, where there’s a grace period between when the purchase is made and when interest starts to accrue.

When Can I Consider a Cash Advance Online?

Like we’ve said, because of their high interest rates and fees, you need to be careful when it comes to using cash advances. Having said that, there are certain scenarios where it may be appropriate to apply for one. Specifically, if you need fast funds to deal with an emergency and you don’t have any other option, a cash advance online or in person may be worth considering. However, you’ll need to make sure you have a realistic plan in place to pay it back before you pull the trigger and submit an application.

person using a power drill to fix a door.

So, what constitutes a reasonable situation to apply for one? This could include times when:

  • You’re facing a home repair that could lead to bigger expenses down the road if you don’t deal with it right away.
  • You need to take an unexpected trip to the emergency room.
  • You need to pay for a car repair right away or otherwise risk missing shifts at work.

Just remember that a fast cash advance should only be used as a last resort.

When Should I not Use Cash Advance Loans?

While there are times when cash advance loans may be a reasonable funding option, there are plenty of instances where you should avoid them. We’re going to look at some of those scenarios now.

1. To Pay Recurring Bills

Because of how expensive they can get, you should generally avoid paying bills with a cash advance. Otherwise, you’ll risk falling into a continuous cycle of debt, especially if you don’t have the means to pay back what you’ve borrowed.

When it comes to paying for regular or recurring bills, you should generally have these costs accounted for in your regular budget. But what if you’re not already working with a budget? Don’t panic; it’s never too late to start! There are plenty of different types of budgeting methods out there, so do some research and try out what you think would work best for you. If you need some help getting the ball rolling, here are some budgeting guides for you to check out:

If you need more tips on budgeting, take a look here.

2. Right Before Going into Bankruptcy

You might think that if you take a cash advance right before filing for bankruptcy, you’ll get off scot free, right? Well, that’s not exactly how it works. When you file for bankruptcy, any new credit card that you may have taken on recently doesn’t automatically disappear. This is often considered to be a red flag by the creditors and judge who reviews your debt. If you take a cash advance right before filing for bankruptcy, it may suggest that you had no intention of repaying what you’ve borrowed. This can be considered a form of bankruptcy fraud, and if that’s the case, you’ll likely end up having to pay that cash advance back anyways[1].

3. To Pay for Discretionary Purchases

Of all the reasons to apply for cash advance loans, doing so to pay for a discretionary expense should be at the bottom of your list. In fact, it shouldn’t be on your list at all. Discretionary expenses are essentially the things that could be classified as the “wants” in your life. So, if it’s not essential to your survival, it can be put into this bucket. This could include things like movie tickets, restaurant outings, or nearly anything you buy just for pleasure. Generally speaking, you shouldn’t take on debt for these types of things.

movie theater popcorn sitting on a counter

Not only can taking on debt for pleasurable purchases do some serious harm to your finances, it can also be emotionally damaging. While it might be normal to feel a little high after making a fun purchase, going into debt just to chase that feeling can lead to regret. And the more debt you rack up in the name of pleasure, the more regret you may end up with.

Will Cash Advance Loans Harm My Credit Score?

Generally speaking, taking out a cash advance may not have a direct effect on your credit score, but that doesn’t mean it won’t have some impact in a more indirect way.

For example, let’s say you decide to take a cash advance through your credit card. When you take on this extra debt, it’ll raise your credit utilization rate. This is essentially a percentage that shows how much of your total available credit you’re using. So, if the only debt you have is the $300 you’ve used on your single credit card that has a $1000 limit, your credit utilization rate is 30%.

Why is this figure important? Well, it’s a number that different scoring models will use to help come up with your credit score. Let’s take a look at that previous example we gave to show how a cash advance can affect this. If you take an additional cash advance of $200 from your credit card on top of the $300 you already owe, your credit utilization rate jumps up to 50%. Generally speaking, you don’t want this number to exceed 30% as it may suggest to scoring models that you spend above your means or won’t have an easy time handling more debt.

On top of this, if you don’t have a plan in place to pay them off, you might find it difficult to deal with the high fees and interest rates that come with a cash advance. If this leads to you missing payments on loans and bills, you could do even more damage to your credit score. Why? Because your payment history is the highest weighted factor that scoring models look at to determine your credit score.

Handle Cash Advance Loans with Care

If you do find yourself facing an emergency expense at any point and you don’t have the savings to deal with it, a cash advance may be a viable option. But don’t forget that these aren’t financial products that should be used lightly. With their high interest rates and expensive fees, they should only ever be used as a last resort. So, only use them when the situation calls for it AND when you know that you’ll be able to repay what you’ve borrowed. Otherwise you risk getting into an unhealthy cycle of debt.

Disclaimer: This article provides general information only and does not constitute financial, legal or other professional advice. For full details, see CreditFresh’s Terms of Use.

[1] https://upsolve.org/learn/cash-advances/

Posted in: Online Loans