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Cash advances and payday loans are two standard solutions for getting cash quickly and efficiently when you need it. Yet, they are not the same, and being aware of these differences will allow you to choose the best option.

In this article, we will define cash advances and payday loans, as well as discuss the advantages and disadvantages of each and how they differ. Together with alternatives to these loans, we’ll offer advice on how to manage your money.

Payday loans are short-term loans to be paid back with your next paycheck. Whereas, cash advances let you borrow up to the credit card’s limit and is due on your next bill.

What Is a Cash Advance?

A cash advance is a short-term loan that allows you to borrow money against the limit on your credit card. How much you can borrow will depend on your credit limit, and there will usually be a fee for the transaction. The interest rate on cash advances is generally higher than the standard interest rate for credit card transactions.

There are numerous ways to receive cash advances. You can use your credit card to make an ATM withdrawal, ask your credit card provider for a check, or cash a convenience check they may mail you.

Cash advances have the benefit of being simple to get and offer quick access to money when you need it. Nevertheless, they can be pricey, and if you don’t pay back the loan on time, the interest and fees can mount up quickly.

The Consumer Financial Protection Bureau (CFPB) estimates that 5% to 7% of the loaned amount is the typical cash advance cost. This implies that in addition to the interest charges, you will also pay a $25 fee if you borrow $500.

What Is a Payday Loan?

A payday loan is a brief loan that must be paid back with your next paycheck. The amount you can borrow from a payday loan is usually limited, depending on your income. The repayment time is typically two weeks; occasionally, it may be longer.

Payday loans can be granted from businesses that specialize in giving out short-term loans. You can also get payday loans online, but you should be careful to pick a reputable company.

Payday loans have the benefit of being simple to get, even if you have low credit. These may be quite expensive and have interest rates that reach 400% APR, which is a drawback.

The average payday loan is $350, and the average cost is about $15 for every $100 borrowed, according to the CFPB. Hence, if you borrow $350, you will also be required to pay a fee of $52.50 in addition to the interest costs.

Differences Between Cash Advances and Payday Loans

Although payday loans and cash advances are short-term loans that might give you quick access to cash, they differ in several ways.

  • Interest Rates: A cash advance often carries a higher interest rate than credit card transactions. The Federal Reserve reports that in the fourth quarter of 2021, the average interest rate for cash advances was 23.5%, while the average interest rate for credit card purchases was 14.9%. Payday loans, however, could carry interest rates of 400% APR or higher.
  • Repayment terms: Usually, cash advances must be paid back by the due date on your following credit card statement. However, if you only make the minimum payment, you can put off paying back the cash advance. Payday loans must be repaid on the following paycheck, which is usually two weeks after the original date of borrowing.
  • Fees and Charges: Cash advances often come with a fee of roughly 5% of the borrowed amount and interest costs. The standard price for a payday loan is $15 for every $100 borrowed plus interest.
  • Availability: Anyone with a credit card can apply for a cash advance, although your credit limit might constrain the amount you can borrow. Regardless of credit history, anyone with a job and a bank account can apply for a payday loan.
  • Credit Requirements: Cash advances require a credit card, so having good credit is necessary to be eligible. Payday loans don’t need excellent credit but demand income documentation.

Which One Is Right for You?

There are several things to take into account while choosing between a cash advance and a payday loan:

  • Credit Score: A cash advance can be a better choice if your credit is substantial since you can benefit from lower interest rates on credit card purchases. A payday loan can be your only choice if your credit could be better.
  • Repayment Period: If you need more time to repay the loan, a cash advance might be a better choice because you can extend the repayment period by only making the minimum payment. A payday loan can be a better choice if you desire to repay it soon because it is due on your next paycheck.
  • Fees and Charges: You should look into other choices if you cannot pay the fees and charges associated with a cash advance or payday loan.

Alternatives to Cash Advances and Payday Loans

There are several quick-cash alternatives to cash advances and payday loans:

  • Personal Loans: Personal loans are an installment loan type that is open-ended. They usually have longer terms for paying them back and lower interest rates than payday loans and cash advances.
  • Credit counseling: Credit counseling can help you make a budget and a plan for dealing with your debt to help you pay it off.
  • Transferring credit card balances: If your credit is strong, you can switch your high-interest credit card balance to a card with a lower interest rate. This can help you pay off your debt more quickly and save on interest fees.

Key Points

  • Payday loans are short-term loans to be paid back with your next paycheck. Cash advances, on the other hand, let you borrow up to the credit card’s limit.
  • While payday loans can have interest rates exceeding 400% APR, cash advances have higher interest rates than typical credit card transactions.
  • Most people get payday loans from payday lenders or online businesses, but you can get a cash advance at an ATM, by asking your credit card company for a check, or by using a convenience check.
  • Cash advances are usually due when you get your next credit card bill. On the other hand, payday loans are typically delinquent when you get your next paycheck.
  • Payday loans often cost about $15 for every $100 borrowed, plus interest, whereas cash advances typically charge a fee of roughly 5% of the amount borrowed, plus fees.