Are Cash Advances Worth It?

Have you ever been in a situation where you're strapped for cash? Maybe you're in a small store with a "cash only" sign above its register, or maybe your taxi driver won't accept payment by card. Or maybe you just need a small loan to cover bills until payday comes?

It's times like these that a cash advance can be very tempting – but are cash advances worth it, really?

What is a cash advance?

Simply put, a cash advance is a brief loan on your credit account. Your bank or lending institution can provide you with a couple of options, but the most common type of cash advance is when you make a withdrawal from your credit account at a bank, ATM or even the supermarket. It can also occur when you transfer money from your credit card to another bank account. There is often a limit on how much you can withdraw from your credit account, too.

If you opt for a cash advance loan, these are usually smaller than most other types of loan. For example, you can borrow up to $2,000 with Sunshine Loans.

How does a cash advance work?

A cash advance works just like any other advance loan, although some cash advances can be used to purchase a cash equivalent, such as gambling chips and lotto tickets. When applying for a cash advance loan, the application process is quick, though your lender may require you to undergo a credit check.

A cash advance loan will usually come with interest, an establishment fee and monthly fees, or a combination of these.

Fees Associated With A Cash Advance

Cash advance fees will differ depending on the type of loan you take out.

If you take out a cash advance using your credit card, you will either incur a flat fee (usually around $5) or a percentage fee (around 3%) based on how much cash you withdraw. On top of this, interest is charged on the cash you withdraw – quite often, the interest charged is significant. The number can range quite significantly, but the average is around 17%. And unlike purchases on your credit card, which have a time period in which you can pay off the purchase before interest is charged, cash advancement fees begin to accrue interest immediately.

It really does make you wonder: are cash advances worth it?

Cash Advance Options

These are the most common types of cash advances:

  • Credit card. Most ATMs will allow you to withdraw money from your credit card account. But beware of these, as fees can be as high as 20%.
  • Payday loan. These are small loans of up to $2,000 and are usually repaid via direct debit from your bank account or by way of ongoing deductions from your future pay. You also have between 16 days and 1 year to repay a payday loan.
  • Overdraft facility. This needs to be set up with your bank and allows you to overdraw your account to a certain limit. Fees and rates aren't set on this until you make a withdrawal from the overdraw facility, so you should only use this in an emergency.

The Pros & Cons Of A Cash Advance

Are you still weighing up the consequences of a cash advance? Here's a pros and cons list to help you make up your mind.

Pros

  • Convenience. A cash advance can put cash in your hand in the time it takes to punch in your PIN number on an ATM machine.
  • Speed of approval. Cash advances in the form of payday loans usually have fewer requirements than other loans.
  • Fixed loan amount. Cash advance loans tend to be quite small, so they are a reasonably manageable form of loan.

Cons

  • Expense. Cash advances from ATMs, payday loans and overdrafts all come with fees – some are one-time, some are a percentage of your withdrawal, and sometimes it's both.
  • They can lead to a cycle of debt. If you choose to extend your loan, you'll end up paying more money in the long run – especially if you continue to renew the loan over an extended period of time.
  • Credit score impact. Any loan, however small, will impact your credit score – especially if you apply for many loans at a time or fail to repay them on time.

How To Apply For A Cash Advance

To apply for a cash advance loan, you'll need three things: a credit check, employment verification, and documents such as driver's licence or passport. Most cash advance applications can be completed online. To be eligible to apply, you'll need to be aged 18 years or over, earn a regular income, and you must be able to afford to repay the loan.

To apply for an overdraft, you'll need to contact your banking institution.

If you've been wondering "are cash advances worth it?", we hope this article has been helpful in answering this question for you. If you need more financial advice, check out our blog for handy hints and tips.