If you're living paycheck to paycheck — and the latest data reveals 67% of American workers are — a cash advance can feel like the perfect fix. In just a quick stop at the nearest ATM, you can get access to cash fast, since you're borrowing against your credit card line of credit.
The big problem? It's expensive. Here's the only time a cash advance makes sense, plus alternatives to consider before making that move.
The only time to consider a cash advance
Cash advances are short-term loans with seriously high interest rates, like near 30% APR. That's more than what your credit card charges on everyday purchases (when you don't pay your bill each month). It gets worse: The interest on cash advances starts accruing immediately, and you have to tack on fees, which can either be flat or anywhere from 3% to 5% of the cash advance amount.
We were curious: Is there ever a situation that would call for resorting to a cash advance? Yes, in emergencies, CFP Otto Rivera, an investment manager at White Lighthouse Investment Management, tells CNBC Select. This would be an instance where you need cash immediately and have no other options, like, he points out, for an emergency medical expense or if you're traveling abroad and need access to cash.
"A cash advance may play a part, just to fix the situation and then move on," he says.
Rivera adds: If you have to, cash advances should only cover smaller amounts and shouldn't be done more than once or twice.
Better alternatives to a cash advance
Before taking out an advance, consider first a personal loan that has lower interest rates and better repayment terms, or even ask to borrow money from family or friends (with a solid repayment plan in place, of course).
"Financial products are tools, and there are better tools than others for short-term funding or short-term liquidity," Rivera says when comparing cash advances.
Personal loan
With a personal loan, you borrow a fixed amount of money from a bank or lender and repay it in monthly installments over a set period of time, often one to five years. Interest rates are usually lower than those on credit card cash advances, especially if you have good credit.
Upstart approves borrowers with credit scores as low as 300, and they can apply for loans as small as $1,000, up to $50,000. There are no penalties for paying off your balance early. Avant offers funding as early as the next business day after approval and, if you're facing financial hardship, Avant may temporarily lower your interest rate for anywhere from three months to a year.
We like that Upstart considers factors besides credit score, including education, income and employment history. However, co-signers aren't accepted.
- Accept applicants with bad or no credit
- Minimum APR is lower than many competitors'
- Approves personal loans up to $75,000
- Most loans are funded the next business day
- Origination fee of 0% to 10%
- Doesn't allow co-signers or co-borrowers
This online lender approves borrowers with lower credit and income requirements than many competitors. We also like its speedy approval process and next-day funding, although it won't pay your creditors directly if you have a debt consolidation loan. The APR and origination fee for applicants with weak credit can be high, but the tradeoff may be worth it if you've been unable to get approved elsewhere.
- Lends to applicants with poor credit
- Funding often available next day
- Late-payment grace period of 10 days
- Origination fee of up 9.99%
- No autopay discount
- Doesn't offer direct payment to creditors for debt consolidation loans
- No co-signers or collateral
Pros and cons of a cash advance
Here are the benefits and drawbacks to consider when taking out a cash advance:
Pros
- Quick access to cash: You can get money immediately from ATMs, banks or via special checks.
- Works when cards aren't accepted: Useful for purchases that only accept cash, like lottery tickets or some small businesses.
- Emergency use: Could work for emergency expenses, like car repairs or medical bills, when in a financial bind.
Cons
- No grace period: Cash advance interest starts accruing immediately, often at a higher rate than the APR on your regular credit card purchases.
- Fees apply: Cash advances come with fees, typically ranging from 3% to 5% of the cash advance amount withdrawn.
- Lower limit: Your cash advance limit is smaller than your total credit limit, so you can't borrow as much as your credit allows.
- Risk to credit: Frequent or unpaid advances can hurt your credit score and make debt harder to manage.
FAQs
How does a cash advance work?
A cash advance lets you borrow money from your credit card or lender, usually with high fees and interest that starts accruing immediately.
Do cash advances hurt your credit?
Taking a cash advance doesn't directly lower your credit score but high balances and high-interest debt can make it harder to manage credit, which may negatively affect your score.
Is a cash advance a good idea?
Generally, no. Cash advances are an expensive short-term solution best reserved for true emergencies when no other options are available.
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Meet our experts
At CNBC Select, we work with experts who have specialized knowledge and authority based on relevant training and/or experience. For this story, we interviewed Otto Rivera, a CFP and investment manager at White Lighthouse Investment Management.
Why trust CNBC Select?
At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every personal finance article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of personal finance products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.
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