Cash Advance APR: What It Is & How It Works
The average savings account balance of an American family is around $12,000, which is quite enough for most emergencies. Young people, on the other hand, either can’t or wouldn’t have this much money set aside, on average having a little over $4,000 in their savings. In case of any unexpected expense, they might have to borrow money from someone or opt for a cash advance. But is getting this loan worth it at all? In this article, we’ll explain cash advance APR meaning, how it works, what its pitfalls are, and how to avoid them. Let’s go!
What Is a Cash Advance?
A cash advance is a quick loan that is usually obtained via a credit card. Basically, when you take out a cash advance, you borrow against the credit limit on your card. However, unlike just buying something directly, there are additional APRs and fees. Besides, some issuers could set a low credit limit for cash advances. That’s why it’s a short-term solution at best, and might not get you enough to pay for significant expenses on its own.
How to Get a Cash Advance, and How Does It Work?
The process varies depending on the type of cash advance and the lender. Yet, the steps you need to take are quite similar:
- Use an ATM: You can use an ATM to withdraw a cash advance, just like with a usual debit card. Insert your credit card into an ATM, input your PIN, and choose the cash advance option. You can then withdraw cash up to the limit determined by your card provider. Be careful, as some ATMs might charge you extra on top of fees and interests set by your credit card issuer.
- Visit a Bank: If you have a local bank branch in your area, you can request a cash advance at the teller. Just don’t forget to bring your ID! As with an ATM, a bank will give you cash up to your card’s pre-set limit.
- Use Convenience Checks: Some credit card companies provide checks tied to your account. You can write a check to yourself and cash it, which functions as a cash advance.
What Kinds of Cash Advances Are There?
There are various forms of cash advances, meaning you’ll have to know the difference to really use this system to your advantage.
Credit Card Cash Advances
A credit card cash advance allows a cardholder to get a short-term loan using their bank credit card. Typically, you can withdraw between 20% to 30% of your available credit limit, though some cards may allow you to access 50% or more. This option is good for getting some money when time is of the essence, but note that cash advance APR is typically higher than for a regular purchase, making such loans extremely costly in the long term.
Payday Loans
These are short-term loans that you must reimburse on your payday, hence the name. In most circumstances, the lender will want evidence of income, such as a prior salary stub. You can get a payday loan both online and in person at the bank.
Payday loans typically have low borrowing limits, often up to a few hundred dollars, and often come with unbearably high fees. For each $100 taken, the borrower has to cover interest costs, which range from $10 to $30. On the transaction date, these costs are added to the principal amount of the loan.
Let’s say you have to borrow $500 with a $20 fee per $100 from your company. So, by your next paycheck, you would need to repay $600 in total, which includes the original loan amount and fees. If we express the cost of such a loan as an annual APR, it would have an interest rate of 521.4%.
Merchant Cash Advances
Merchant Cash Advance (MCA) is a model of business financing under which the lender provides an up-front cash payment in exchange for a percentage of future sales. Instead of a fixed monthly payment, the lender takes a portion of the business’s daily or weekly profits until the advance is repaid (including any fees).
MCAs typically have more lenient qualification criteria, but they can be costly due to high fees and repayment rates. So, they are best suited for stable businesses that need to fund some short-term expenses.
Terms, Conditions, and Fees for Cash Advances
Since quick loans often carry high fees, it’s important to stay forewarned and forearmed.
What is a Cash Advance APR?
If you withdraw money through a cash advance, there is an additional APR, typically quite high compared to regular shopping. Usually, interest is charged right away, and there can be other costs involved.
To find out the cash advance APR for your card, check the terms and conditions of your credit card agreement or credit statement. You can also reach out directly to your card issuer and request their assistance.
What is a Cash Advance Fee?
It’s a percentage charge you incur when you withdraw cash from your credit card. Usually, it’s between 3% and 5% of the withdrawal amount or a flat fee, whichever is higher. This fee is added to your total advance amount, making it an expensive way to access cash. For instance, you’ll have to pay $12 for a $440 cash loan with a 3% charge on top of your APR rate.
Is There a Grace Period?
When you go shopping with a credit card, the issuer often grants you a grace period of no less than 21 days. During this time, you won’t be charged interest if you pay off your debt in full before the due date. However, you can expect no such comforts when dealing with a cash advance. This means interest starts adding up right away.
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Generally, applying for cash advances is not beneficial and is only recommended for actual emergencies. If your family member or friend can transfer money to you, stick to this alternative. If you absolutely must get a cash advance, withdraw as little as possible and repay as fast as you can.
