When it comes to borrowing money, there are two main options: a loan and a cash advance. Both have their advantages and disadvantages, so it's important to understand the differences between them before making a decision. A loan is a sum of money that is borrowed from a lender and repaid over time with interest. To repay a traditional loan, you pay monthly installments of a fixed amount that is due at the same time each month.
On the other hand, a cash advance is a short-term loan from a bank or alternative lender. The remittance is made at daily or weekly intervals and the amount fluctuates depending on your credit card income. The main difference between the two is that an advance charges all interest on the total amount upfront, while a loan charges interest on a smaller amount each month as principal is paid. If you prefer to wait until you earn money to fulfill your agreement, a cash advance would be the best option.
However, if you're looking for a firm payment schedule, a loan is the best option. Cash advances usually have high interest rates and charges, but they are attractive to borrowers because they also have quick approval and fast financing. Online lenders offer a variety of services and financing options that resemble the ease and speed of a cash advance. Card issuers charge an initial fee, often 3% to 5% of the cash advance amount, and the bank or ATM usually charges a fee for their share of the transaction as well.
The amount you can borrow through a cash advance is usually limited to a percentage of your credit card limit. Getting a cash advance may seem like a good idea right now, but it can quickly lead you to accumulate debt. Payday loans, installment loans, and car title loans come with high rates and charges that can trap you in a debt cycle. Since payment processors already had access to a merchant's financing account for credit card sales, it made sense to use them to streamline the cash advance process.
These are quick-cash options that have higher interest rates than cash advances and personal loans, and have the potential to trap borrowers in a debt cycle. The speed of cash advances coupled with technology helped revolutionize the traditional financial industry and opened the doors to a relatively new online lending industry. Potential APR issues aside, both Rios and Saunders warn that payroll advances can lead to a debt cycle just like loans. When deciding between taking out a loan or getting a cash advance, it's important to consider all of your options carefully. While you won't have to go through the process of applying for a personal loan with a new lender, you'll pay prepayment fees and interest in credit card cash.
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