Is A Credit Card Cash Advance Better Than A Payday Loan?


When you need cash right away and don’t have savings readily available, you might consider using a credit card …

When you need cash right away and don’t have savings readily available, you may want to consider using a credit card cash advance or a payday loan.

While both options allow you to get cash quickly, they also penalize borrowers who cannot pay off debt quickly.

Here is an overview of the pros and cons of both options as well as alternatives that could help you avoid the negative effects of a high interest loan.

[Read: Best Cash Back Credit Cards.]

What is a credit card cash advance?

A credit card cash advance is a loan from your credit card that allows you to get cash instantly, whether it’s from an ATM, bank withdrawal, check, or in another way. Expect to pay a cash advance fee, typically ranging from 2% to 8% with a low of $ 10 – and an interest rate at least a few percentage points higher than what you would be charged for. purchases.

With a cash advance, you will likely be charged interest immediately. The grace period you typically get with credit card purchases does not apply.

Is a cash advance good or bad?

A cash advance provides quick cash, but the costs can add up quickly. The most cost effective way to use a cash advance is to repay the money as soon as possible.

This might be a good idea for people who know they will pay it off in a few days and won’t have to pay a lot of interest, says Robert Dunn, vice president of the board at the Consumer Credit Counseling Service in Buffalo.

Before trying to repay the cash advance, check with the credit card issuer to make sure that all the money you send will go towards the cash advance balance. Some companies will apply a portion of your payment at the lower annual percentage rate.

Here are the top reasons to avoid credit card cash advances:

Costs. On top of the short-term costs – upfront fees and interest – you could pay even more in the long term if you only make the minimum payments each month.

Potential credit problems. Cash advances could “affect credit scores because you increase the balance on the card, and if you are having difficulty meeting the terms, negative information, such as late payments, may be reported to the credit bureaus. ”, Explains Rod Griffin, Senior Director. public education and advocacy for the Experian credit bureau.

What is a payday loan?

With a payday loan, you pay an upfront fee to receive up to around $ 500, and additional fees are added if you are not able to pay it off in a typical two to four week period. Interest can add up quickly. A two week payday loan could have a fee of $ 15 per $ 100, which equates to an APR of around 400%, far higher than the rate on a typical personal loan or credit card.

Payday loans are permitted in more than 30 states, with several states capping the interest rate on loans.

To get a payday loan, you borrow against an income source such as your salary, retirement, or Social Security. You write a check for the loan balance or authorize the lender to access your bank account.

The check or withdrawal authorization allows the lender to withdraw the money from your account if you do not pay off the loan on time.

Is A Payday Loan Good Or Bad?

Payday loans can be a great option because they provide quick cash to people with limited access to credit, but sometimes they exacerbate budget problems.

If you are using a payday loan to pay your bills, you will need to find a way to have enough money in your account to cover the loan as well as current expenses, says Jeffrey Arevalo, financial wellness expert at GreenPath Financial. Wellness, a national nonprofit credit counseling agency in Farmington Hills, Michigan.

The ideal is to reimburse it immediately, but “the reality is that, most of the time, it is very unlikely,” adds Arevalo. “It’s something that they will have to keep renewing and repaying over time before they can eliminate it completely.”

Payday loans aren’t meant to be long-term solutions, he says. “Ideally, if we have that option left, we will stress to clients the importance of paying this off as early as possible and even prioritizing it over other debts,” Arevalo said.

[Read: Best Personal Loans.]

Credit Card Cash Advance Versus Payday Loans

Credit card cash advances and payday loans have upfront fees and ongoing charges if they are not repaid promptly.

Payday loans have the highest upfront fees, with fees around $ 15 per $ 100, which works out to $ 75 on a $ 500 loan. Although it can be manageable if the loan is paid off during the loan period.

If you pay off your credit card cash advance within a few weeks, your costs should be lower than a payday loan because the upfront fees are lower and interest won’t accrue.

But the total cost of a credit card cash advance can be more than a payday loan if you only provide the minimum payment for your credit card balance and the interest accumulates over months or months. years.

“Cash advances on a credit card could potentially incur additional charges in the long run if repayment takes a long time,” Dunn said.

Also, if you have a large cash advance that increases your credit card balance, it could negatively affect your credit score over time as you will have a high credit utilization rate.

While payday loans aren’t reported to national credit bureaus, they “can trap you in high-cost perpetual debt that can be financially devastating,” Griffin explains.

Alternatives to Expensive Short-Term Loans

If you are deciding between credit card cash advances and payday loans, the answer might be neither. These are two high cost loans that can be costly in the long run. Consider these other options:

Work with creditors. During the economic downturn caused by the coronavirus pandemic, you may be allowed to skip or withhold payments for:

– Utility bills

– Mortgages

– Auto loans

– Student loans

– Credit card bills

Before taking out a cash advance or payday loan, Dunn encourages people to contact creditors about relief options. For example, you could contact your landlord to make an agreement to pay half of your regular rent.

Relief options could include three to six months of reducing payments, stopping payments for six months, or postponing payments for a few months, Dunn says. For example, the Coronavirus Aid, Relief and Economic Security Act allows homeowners with federally guaranteed mortgages to request a payment term of up to 180 days, with an option for an additional 180 days.

[Read: Best Grocery Credit Cards.]

Use of home equity. While getting a home equity loan or line of credit isn’t an immediate solution, you may want to consider it if you have enough equity in your home. If you can’t pay it back, you risk losing your home. Also, keep in mind that home equity loans can be more difficult to obtain, as economic conditions during the COVID-19 pandemic led lenders to tighten their standards.

Retirement account withdrawals. The CARES Act allows people to withdraw up to $ 100,000 from their retirement accounts without incurring the usual 10% penalty if they have been diagnosed with COVID-19 or are in financial pain. You still have to pay taxes on the withdrawal, but they could be spread over up to three tax years. The IRS is offering a question-and-answer session on coronavirus-related distributions.

A retirement account withdrawal won’t affect your credit and could help you avoid more debt, Arevalo says.

Enlist the employer’s help. Even if it’s not easy, you could ask your employer to buy back your vacation days or advance on an upcoming check.

“I tell clients that the worst thing (employers) can say is no, and that’s okay,” Arevalo says.

Also consider changing your payroll contributions on your paycheck to increase cash flow. However, be aware that you may have to pay more taxes next year as a result.

Build a banking relationship. A local bank or credit union may have COVID-19 relief loans available as long as you meet their credit standards and have a stable income. Check your credit scores and show that you have good credit risk.

“They will have a lower interest rate than cash advances and payday loans,” Arevalo says of the relief loans.

Go for a peer-to-peer loan. These loans may require less paperwork than a bank or credit union loan, but they still require that you have a 600 to 640 credit score and a stable source of income. Interest rates can be high compared to credit cards, Arevalo says.

Get help from your friends or family. If you need the cash right away and you can count on a friend or family member to wait a few weeks or more for your money back, this might be a better alternative to a credit card cash advance or a payday loan. You can also try to find someone to co-sign a loan. Either arrangement requires an agreement between the borrower and the lender, and you don’t want to damage the relationship if you can’t pay it back on time.

Regardless of how you handle a short-term financial crisis, working with a credit counselor is a good way to prevent it from happening again. For example, an advisor can help you budget and reduce your expenses.

“You need to know what you are able to afford on a monthly basis,” says Arevalo. “And only then can you determine which options make sense. “

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