Cash Advance

Last Updated :

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Blog Author :

Prakhar Gajendrakar

Edited by :

Raisa Ali

Reviewed by :

Dheeraj Vaidya, CFA, FRM

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What Is A Cash Advance?

A cash advance is an instant short-term loan obtained without formal application submission. The cash withdrawal occurs over the counter at a financial institution or an ATM using a credit card.

Cash Advance

Different types include credit card cash advances, merchant cash advances, and payday loans. It resembles cash withdrawn from one's bank account. However, the difference is that it is typically withdrawn using a credit card or convenience check and based on an individual's credit limit, not their bank deposits.

Table of contents
  • A cash advance on credit card is a loan that happens when the holder withdraws money from an ATM or bank using their card.
  • Its advantages include the quick availability and absence of collateral requirements.
  • These loans usually come with a higher interest rate and fee. It is considered the most expensive transaction an individual can make using a credit card.
  • It does not directly hurt the credit score but is added to the already existing balance a person has on their card and is mentioned in the billing statement.

Cash Advance Explained

Cash advances are loans borrowed directly from a credit card. These loans are liabilities and expensive since the service providers charge high-interest rates. Also, it is generally used by people in dire need of funds and ready to pay it back with interests. As a result, many finance experts see this type as the most expensive transaction a cardholder can make from their credit card.

Compound interest will be charged on the advance starting when the customer receives the money. Furthermore, most credit card companies only permit customers to use a small portion of their authorized revolving credit line for advances. It can be 20% or 30% of the available credit limit. Therefore, it indicates that the advance limit is lower than the credit limit. Essentially, it is an expensive alternative to other faster methods to get money like personal loans, retirement account loans, etc.

Cash Advance Fee

Separate high-interest rates and fees are associated with the cash advance. It may vary from one credit card company or service provider to another. Credit card companies charge a flat fee or a certain percentage of the loan taken, ranging from $5 to $12 or 3% to 8%. In addition, if an individual uses an ATM or even visits a bank to have an advance, the banks may charge them a service charge or fee for taking an advance.

One important factor is that these advances typically do not come with a grace period. Therefore, a borrower is charged with an interest starting from the day they withdraw the cash. The interest rate ranges from 17.99% to 29.99% annual percentage rate (APR).

Advantages & Disadvantages

Let's look into some of the advantages and disadvantages:

Advantages

  • Instant cash advance means even if a person applies for it online, the money will be available to them in 24 to 48 hours.
  • A customer with bad credit history can also avail of it. If a person has defaulted in the past has a credit balance left, they can still take a cash advance.
  • It is a form of unsecured loan, so the borrower doesn't have to put collateral.
  • There is no paperwork required or documentation process.

Disadvantages

  • It is a temporary solution for immediate requirements.
  • The interest rates are exorbitantly high and taken when people are in a helpless situation.
  • It indirectly jeopardizes the credit score of the borrower.
  • They are generally treated as red flags, financial pitfalls, and one of the key factors that make people get stuck in a debt trap.

Frequently Asked Questions (FAQs)

What is a cash advance on a credit card?

An individual can use their credit card at an ATM to withdraw cash; this cash will be offered as a short-term loan or advances with a higher interest rate. At a bank, the credit card holder can ask the personnel for the same by filling out a letter for cash advances on their credit card.

Do cash advances affect credit score?

It never directly sabotages a person's credit score. Generally, it is not even mentioned on the credit history. But the cash advance loan will be treated as debt and added to the person's credit card bill, indirectly affecting the credit score if the borrower defaults and the utilization ratio becomes high.

What is a cash advance app?

Customers can deposit money earned into their bank account using cash advance apps before payday. These apps often have no cost or a small fee, but they usually don't add interest on the loans.