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What is a Cash Advance and How Does it Work?

November 12, 2020

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A cash advance is a short-term loan. 

These loans typically offer a fast application process for quick money. 

But you’ll have to pay the money back with interest—and there might be fees, too.

In the past, the two main ways to get a cash advance are with a payday loan business or a credit card.

Both options feature cash advance loans with much higher interest rates than other kinds of personal loans. 

Because of the high interest rates, these cash advance options are usually not the cheapest way to go.

Now there’s a third option—banking apps.

Online banking apps offer cash advances which typically come with much lower interest and fees.

Let’s take a look at each option for cash advances. Then we’ll walk through how to use a cash advance the right way.

Payday loan cash advance

We’ve all seen the signs for businesses advertising payday loans.

These places offer fast cash advances without asking too many questions.

But these places also feature sky-high interest rates and fees, so they are not good options for consumers.

Due to the high cost of borrowing at payday loan businesses, people who use them often end up with more debt than they originally had. 

So payday loans are a very expensive way to borrow money.

If you need a cash advance, we recommend finding another option besides a payday loan business. 

Credit card cash advance

Credit cards allow you to make purchases with a revolving line of credit. 

The money used to make purchases is usually due at the end of the month or it begins to pick up interest, which you’ll also need to pay back.

Aside from making purchases on credit, some credit cards allow cash advances.

But if you use your credit card for a cash advance, keep a close eye on the fine print. 

Credit cards usually charge higher rates for cash advances than they do for purchases. 

Most credit cards include a purchase APR that’s different from the regular APR offered by the card. 

The credit card’s purchase APR may be much higher than the regular APR that’s advertised, so it’s important to pay close attention before agreeing to an advance.

Another thing to keep in mind is when the interest for the cash advance begins.

If you make a regular purchase with a credit card, you usually have an interest-free grace period until the end of the month.

But with a cash advance, that grace period might not exist.

Credit cards typically charge interest on cash advances as soon as you accept the money. 

Due to higher interest and lack of grace period, credit cards are usually not the best choice for a cash advance.

Although these cash advances are usually less costly than payday loans, credit cards still charge high interest rates to consumers, which means it’s not a great option if you need cash fast.

Thankfully, there’s now a third option that works better for consumers.

Banking app cash advance

Banking and personal finance apps are beginning to offer cash advances.

The cash advances from these apps almost always come with much lower fees than credit card and payday loan cash advances—and some apps don’t charge interest for cash advances at all.

But this is a newer form of a cash advance, so it’s important to research the app first.

Apps offering cash advances usually have other services, as well. 

These services include things like online investing, cash-back shopping, as well as online banking and other account services.

Before signing up with a banking or finance app, it’s important to understand all of the app’s features so you know what you’re getting into.

If the app requires you to sign up for other services you don’t need, it might not be worth it just for a cash advance.

But if you’re in need of a cash advance that just can’t wait, finding an app that offers one is probably much better than using a credit card or payday loan business.

Using a cash advance the right way

If you find yourself in a position where you need a cash advance, you’re probably only thinking about what needs to be paid off right now. 

But before taking any cash advance, it’s important to think ahead.

Using a cash advance the right way means having a plan to pay the money off before you agree to take it. 

Before taking an advance, ask yourself a few questions:

  • What’s the smallest amount I can borrow while still covering what I need? 

  • What are the fees and interest included in the advance?

  • When will I be able to pay the money back?

The reason why it’s important to have a plan before taking an advance is simple—you don’t want to get trapped in a cycle.

If paying back last month’s advance is going to require taking another advance next month, then you’ll be stuck applying for new cash advances month after month.

You never want to be dependent on cash advances long-term. These advances are only meant as a path to small loans that can be paid back quickly. 

But if you’re careful and plan ahead, a cash advance can be a helpful tool in the time before your paycheck comes in. 

If you’re not sure which route to go, you can always start by asking your bank.

Opinions, advice, services, or other information or content expressed or contributed here by customers, users, or others, are those of the respective author(s) or contributor(s) and do not necessarily state or reflect those of Varo Bank, N.A. Member FDIC (“Bank”). Bank is not responsible for the accuracy of any content provided by author(s) or contributor(s).

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Julian Dossett

Julian Dossett

Julian is a tech and finance writer, covering stories from artificial intelligence and cryptocurrency to personal loans and credit cards. His work has appeared at The Simple Dollar, Bankrate, and Blockchain Beach. As a former Cision editor, Julian worked across the table from many of the nation’s most trusted brands. He’s currently based in New Mexico.

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