Cash advance loans, also commonly known as payday loans, are short-term loans targeted at providing immediate funds to consumers until their next paycheck. They are becoming an increasingly popular option for many Americans in meeting unexpected financial needs or bridging cash flow gaps between paydays. However, these types of loans also come with certain risks that consumers need to be aware of.
This comprehensive guide aims to provide an in-depth overview of how cash advance loans work, key terms and conditions borrowers should understand, potential advantages and disadvantages, as well as alternatives consumers may want to consider first before resorting to payday lending. By understanding all aspects of these loans, readers can make fully informed decisions about whether cash advances make sense for their specific financial situation and needs or not.
What Are Cash Advance Loans?
Cash advance loans, also known as payday loans, check advance loans, deferred deposit loans, or post-dated check loans, are a type of short-term, high-interest loan designed to provide consumers with quick cash until their next paycheck arrives. They are intended for small amounts, usually between $100 to $1000, and structured around the borrower’s pay cycle.
These loans allow consumers who may not have access to more traditional lines of credit to obtain small loans on short notice. Cash advance lenders provide funds quickly with minimal requirements compared to banks or credit card companies.
While cash advances offer the benefit of speed and accessibility, they come at a very high cost. Interest rates and fees are extremely high compared to other forms of credit, which can lead borrowers into difficult debt cycles if used improperly.
It’s important for consumers to have a clear understanding of how these loans work and the associated risks before utilizing them for short-term financial needs.
How Do Cash Advance Loans Work?
Cash advance loans have a straightforward application and funding process that provides borrowers access to cash in as little as a few hours, with minimal eligibility requirements.
The Application Process
To apply for a cash advance loan, borrowers can either go to a physical payday lending store or fill out an online request form. The application asks for basic personal and employment details such as:
- Full legal name
- Home address
- Phone number
- Social security number
- Employer name and work phone number
- Income amount and frequency
- Checking account number and routing number
Approval decisions are usually made within minutes or hours, at most 24 hours. Lenders run basic verification checks of the applicant’s identity, income, and existing checking account.
Importantly, cash advance lenders do not do formal credit checks as part of the application process. This allows borrowers with poor credit or no credit history to still qualify. Approval is based primarily on verified income.
Receiving Loan Funds
Once approved, borrowers can receive the loan funds immediately either in cash at the store or via direct deposit into their checking account within hours or by the next business day.
Loan amounts range from $100 up to $1000 depending on state laws. First time borrowers often have lower limits around $300, which can increase after repaying initial loans.
The full loan principal amount borrowed, without any deductions, is provided to the applicant upfront.
Repaying the Loan
Borrowers are required to repay the full loan amount plus any fees and interest in one lump sum payment by a specific due date, which is usually set to align with the borrower’s next payday. Typical repayment periods range between 7 to 30 days from the date the loan was taken.
For example, if a borrower takes out a $500 cash advance with a 14 day repayment term, they will owe the full $500 plus fees and interest charges on their next payday 14 days later.
To secure the loan, the borrower either provides a postdated check or electronic debit authorization against their checking account for the agreed repayment amount on the set due date.
Key Terms and Conditions
While accessing funds through cash advances is easy and fast, it comes at a high cost. Consumers should understand the key loan terms and costs associated:
Interest Rates and Fees
- Interest charges – Cash advance loans carry very high annual percentage rates (APRs), averaging between 300-400%. This translates into daily interest rates of around $15-30 per $100 borrowed.
- Service fees – In addition to interest, lenders charge service fees such as application fees (up to $30), origination or acquisition fees (1-10% of amount borrowed), and late fees ($10-30).
- Rollover fees – If borrowers cannot repay on time and roll over the loan, additional fees are charged. This further increases costs.
- Non-sufficient fund fees – If automatic debits bounce due to insufficient funds, banks will charge NSF fees of $25 or more. Lenders also charge returned check fees.
So for a $300 loan over 14 days, total repayment could be around $375. Costs escalate rapidly with loan size and duration.
Loan Due Date
The full loan amount plus all accumulated fees and interest is due to be repaid on the predetermined due date, which is typically the borrower’s next payday. This gives borrowers an easy timeline to budget repayment by their next income.
Repayment dates range from 7 days to 30 days, depending on the lending period and laws in each state. Borrowers must repay loans in full and on-time to avoid adding further fees.
Cash advance lenders do not do formal credit inquiries as part of the application. They verify identity, income, and bank account standing instead. This allows approval for borrowers with poor or no credit history. However, lenders may check credit after a defaulted loan.
If a borrower cannot fully repay the loan by the due date, some states allow a limited extension via a repayment plan which spreads repayment over a few additional pay cycles. Lenders charge additional fees for extensions.
Cash advance loans typically range from $100 to $1000 for first time borrowers, depending on state maximums. Repeat borrowers with good repayment history can sometimes qualify for higher amounts. Legal limits range between $300 to $1000.
To qualify, applicants need government issued ID, Social Security number, checking account, phone number, and some source of regular income. Minimum age is 18 in most states. Credit, employment, and income verification is conducted as part of approving applications.
Pros of Cash Advance Loans
Despite the high costs, cash advance loans do offer some benefits in certain financial situations:
- Immediate access to cash – Funds are deposited within hours or the next day, much faster than other lending sources.
- Easy qualification – Approval is based on income, not credit scores or collateral. Those with bad credit can qualify.
- Convenient locations – Many physical stores across the country make borrowing quick and easy.
- Small loan amounts – Loan amounts of a few hundred dollars are perfect to meet short term needs between pay cycles.
- Transparent terms – Loan costs, payback date, and payment amount is clear upfront before accepting the loan.
For those with an emergency need and limited alternatives, a cash advance may be an option worth the high costs of short-term access to funds.
Cons of Cash Advance Loans
There are also numerous downsides consumers need to be aware of:
- Very high interest rates – APRs averaging 400% translate into paying $15-$30 in daily interest for every $100 borrowed. This makes costs excessive for long-term use.
- Accumulating fees – Beyond just interest, origination fees and late charges further raise the repayment amount. Missed payments result in additional fees.
- Risk of debt cycle – It’s easy to get caught needing continuous loans if unable to repay the full balance on time, accruing multiple fees.
- Loan flipping – Lenders will encourage borrowers to immediately take out a new loan to repay the old one, leading to mounting interest fees.
- Credit damage – While payday lenders don’t check credit upfront, missed repayments are reported to credit bureaus, negatively impacting credit scores.
- Insufficient funds fees – Bounced checks or debit attempts when the account balance is low triggers additional bank NSF fees of $25-$35.
- Stress – Juggling multiple payday loans with high interest can add tremendous stress and anxiety.
For all these reasons, cash advances should only be used as an absolute last resort after exhausting other more affordable financing alternatives. Borrowers should have a plan to repay loans quickly and avoid rolling them over.
Alternatives to Cash Advance Loans
Due to the costly nature of payday loans, consumers should consider all other lower cost financing options before resorting to a cash advance:
- Credit cards – Many cards allow cash advances at lower interest rates around 25% APR or balance transfers with promotional rates.
- Personal loans – Banks or credit unions provide installment loans from $1,000 up to $50,000 at rates often below 10% APR.
- Employer assistance – Some companies offer advances on wages or low rate emergency loans to employees going through financial hardship.
- Payment plans – Rent, utilities, medical providers may accept payment plans spreading balances over several months for free.
- Government programs – Federal, state, or local government assistance can provide emergency cash for basic expenses like food, utility bills, or rent.
- Negotiating bills – Contact creditors directly to explain circumstances and negotiate more time to pay outstanding balances. Most will work to find solutions.
- Borrow from family/friends – Asking loved ones to borrow money can be an option but be sure to formalize terms and repayment timeline.
- Peer-to-peer lending – Websites like Prosper and LendingClub allow borrowers to get fixed-rate personal loans from regular investors.
- 401k/IRA withdrawals – While not ideal, withdrawing retirement savings can provide needed cash and avoid interest costs.
- Bank/payroll advances – Some banks offer fee-free checking account overdraft while employers provide earned wage advances.
- Credit counseling – Reputable non-profit credit counseling agencies can offer personalized debt management plans and advice.
- Bankruptcy – Legal bankruptcy protection stops collections and provides opportunity to develop debt repayment plan under court supervision.
- Debt consolidation – Debt consolidation combines multiple high interest debts into a single lower fixed rate loan for easier management.
The key is exploring options like these first before deciding to use payday loans, which should only be a true last resort. Planning ahead and budgeting for emergencies via savings can also help avoid short-term cash crunches altogether.
Questions to Ask Before Taking Out a Cash Advance
If you do decide to apply for a cash advance loan, make sure to ask these key questions first:
- What is the exact cost in fees and interest for the loan amount and term?
- What is my total repayment amount including all fees and charges?
- Do you report loan activity to credit bureaus?
- What happens if I can’t afford to repay the full amount by the due date?
- Can I extend the loan term if needed and what are extension fees?
- Do you have programs for financial hardship assistance?
- Are there limitations on consecutive or back-to-back loan renewals?
- Do you validate income and personal details with external sources?
Getting clear answers to these questions will provide full transparency into the costs and obligations associated with the loan to avoid surprises.
Tips for Responsible Use
If you do take a cash advance loan, the following tips can help ensure responsible use:
- Borrow only for true emergencies – Do not use to pay regular monthly bills or discretionary spending.
- Borrow the minimum required – Take out the lowest amount possible that is absolutely needed.
- Have a clear repayment plan – Know exactly when your next paycheck comes and allocate funds to repay on time.
- Avoid extensions – Extensions seem easy but drag out costs over a longer period. Strive to repay in full by the original due date.
- Watch out for rollovers – Consecutive loans roll over costs. Have a plan to break the cycle within a few renewals.
- Build savings – Develop a habit of savings over time so you have a cash buffer for emergencies.
- Improve credit – Pay all bills on time and reduce card balances to qualify for lower cost financing options.
- Explore alternatives – Check other sources like credit cards, friends, or employer first before deciding on a loan.
With discipline and smart planning, cash advance loans can serve as an occasional bridge during financial shortfalls but must be used sparingly and responsibly.
- Cash advance loans provide fast access to a few hundred dollars until a borrower’s next paycheck arrives.
- Extremely high interest rates of 300-400% APR makes these loans expensive, so alternatives should be considered first.
- Approval is quick and easy based on income versus credit score but loans must be repaid in full by the due date.
- Cash advances are unsecured, small, short-term loans that fill temporary cash flow gaps but risk debt cycles if used improperly.
- Consumers should have a plan for repayment, know the total costs, and borrow as little as absolutely needed.
Cash advances definitely serve a need for quick funds during an emergency. But borrowers must take care to use them responsibly and temporarily, not as an ongoing source of financing. The convenience comes at a very high cost if not repaid immediately.
Consumers should exhaust more affordable alternatives first before turning to payday loans. And they must budget carefully to break the cycle of rollovers and extensions. With proper precautions, cash advances can be an occasional helpful financial tool as long as their high expenses, short repayment terms, and risks of long-term debt traps are fully recognized.