How Does a Cash Advance Work?

Introduction

Cash advances provide a way for consumers to quickly access cash in an emergency or to cover unexpected expenses. These short-term, high-interest loans have become an option for those who need funds right away and cannot or do not want to go through traditional lending channels.

While cash advances may seem like an easy fix, they come with risks that consumers should understand. This comprehensive guide will explain how cash advance loans work, their key features, costs involved, considerations for borrowers, and alternatives to weigh before taking out one of these loans.

What is a Cash Advance?

A cash advance is a short-term loan that allows you to receive cash quickly. Other common names for these loans include payday loans, check loans, or deferred deposit loans.

The loans typically range from $100 to $1,000, with an average around $375. Approval often happens within 24 hours or less, and funds get deposited directly into the borrower’s bank account. This provides near-instant access to cash for those with an urgent need.

One of the defining features of a cash advance is the short repayment term, usually 2 to 4 weeks. The full loan balance, including any fees and interest, is due at the end of this term. Lenders will automatically withdraw the repayment amount from the linked checking account on the due date.

These loans also involve minimal underwriting. Lenders usually only require identification, income verification, and a checking account in good standing. They do not conduct credit checks or assess the borrower’s ability to repay like traditional lenders. This makes cash advances easy to qualify for, even for those with bad credit or past defaults. However, it also means borrowers may end up with unaffordable loan terms.

Overall, the quick approval and funding makes cash advances appealing for those who need immediate access to cash. But these benefits come with higher costs when compared to other financing options.

Typical Cash Advance Fees and Interest Rates

The convenience and easy approval of cash advances come at a price – literally. These loans carry fees and interest rates much higher than other consumer lending products.

Typical costs of a cash advance include:

• Initial fees: Lenders usually charge an upfront fee of 10% to 30% of the total loan amount. On a $500 loan, this would equate to $50 to $150.
• Interest rates: The annual percentage rate (APR) often exceeds 400%. Interest accrues daily, usually around 2% to 5% of the outstanding loan principal.
• Late fees: A late fee, such as $15 to $30, applies if repayment is not received by the due date. These fees can accumulate quickly if the borrower is unable to repay on time.
• Non-sufficient funds (NSF) fees: If the lender attempts to withdraw repayment funds from the linked bank account and gets rejected for non-sufficient funds, the borrower may get hit with NSF fees from both the lender and their bank. This results in additional costs on top of the late fees.
• Rollover fees: If the borrower cannot repay the loan in full by the due date, some states allow the option to roll over or extend the loan term for an additional cost.

With fees and compound interest combined, the total repayment amount on a cash advance is often double or triple the original loan amount. Consumers should carefully consider if these high costs align with their budget and ability to repay.

How Do I Receive Funds From a Cash Advance?

The process to get funds from a cash advance follows these general steps:

1. Application: Consumer completes an application online, in-person, or over the phone. This requires providing personal details and bank account information.
2. Approval: The lender reviews the application and makes an approval decision, often instantly or within 24 hours.
3. Loan agreement: If approved, the borrower signs a loan contract agreeing to the repayment terms, fees, and due date.
4. Loan funding: After finalizing the agreement, the lender deposits the loan amount directly into the linked checking account, typically by the next business day.
5. Repayment: The borrower must repay the full loan balance by the specified due date, usually 2 to 4 weeks from origination. This repayment is automatically withdrawn from the linked account.

Easy disbursement into the borrower’s bank account is a main appeal of these loans. However, consumers should ensure they understand the repayment responsibilities before accepting funds. Failing to repay on time triggers additional fees and penalties.

What Happens If I Can’t Repay a Cash Advance on Time?

Missed payments on a cash advance can start a dangerous cycle of spiraling fees and debt. Options if you cannot repay the loan by the due date include:

• Rollover: In states where permitted, the lender may offer to roll over or refinance the loan for an additional fee. However, this extends the high-interest charges over a longer period.
• Partial payment: Paying any amount possible by the due date shows good faith. But late fees will still apply on the unpaid amount, and the loan stays outstanding.
• Take out new loan: Borrowers might take out a new cash advance to cover the previous one. This again postpones paying off the high-cost loan.
• Collection: If the borrower ceases payment, the lender can send the account to collections, damaging credit scores and resulting in ongoing collection fees.
• Wage garnishment: In some states, the lender can legally garnish a portion of the borrower’s wages to repay the outstanding balance.

Rolling over loans repeatedly or continually borrowing new cash advances to cover old ones leads to a dangerous debt cycle. Missed payments also risk harming credit and facing aggressive collection tactics. Avoiding late payments is critical with these loans.

How Much Can I Borrow With a Cash Advance?

Cash advance loan amounts are typically capped at lower dollar amounts than other types of financing. Some factors that influence how much you can borrow include:

• State regulations: Some states limit cash advance amounts to a percentage of the borrower’s income or set maximum loan amounts such as $500. Lenders must follow applicable state laws.
• Lender policies: Each lender sets their own underwriting policies on loan amounts offered based on income, credit factors, and ability to repay.
• Income level: Consumers with lower incomes may see lower approved loan amounts. The lender wants assurance the borrower can repay the balance.
• First-time borrower: Those borrowing for the first time may see lower loan amounts until they establish a history of on-time repayments with the lender.
• Purpose: Loans for emergency expenses may have lower amounts than those used for higher-cost purchases.

In most cases, approved cash advance amounts will be under $1,000, with many capped at $500 or less. Consumers should borrow only what is absolutely needed to minimize interest costs.

Do Cash Advances Affect Your Credit?

One appealing feature of cash advances for some borrowers is that they do not require a credit check or negatively impact credit scores like other loans. However, there are some potential credit impacts to understand:

• No hard inquiry: Cash advance lenders do not pull your credit report to assess scores or history. This means no hard inquiry gets added, which can lower scores.
• Late payments: If you miss the repayment due date, the delinquency can potentially be reported to the credit bureaus, harming your score.
• Debt-to-income: Accumulating multiple outstanding cash advances negatively impacts your debt-to-income ratio. This may make it harder to get approved for additional credit.
• Collections: Unpaid cash advance balances sent to collections appear on your credit report and severely damage scores.

Avoiding late repayments is key to minimizing any potential credit damage from a cash advance. Overall, used prudently and repaid on time, they may have less impact than traditional installment loans or credit cards. However, irresponsible use can still inflict credit score harm over the long run.

What to Consider Before Getting a Cash Advance

Cash advances provide a quick way to access funds but have risks consumers should carefully weigh:

• Urgency of need – Can alternative options address the need through the next pay period? Cash advances should be a last resort.
• Affordability – Review the fees and interest rates. Will you have the funds to repay on time while still covering other obligations?
• Impact on budget – Factor in the repayment amounts to determine if they fit within your regular monthly budget.
• Ability to repay on time – Avoid rollovers that accrue fees and interest. Take a loan only if you can realistically pay back on schedule.
• Alternative solutions – Explore other sources of financing like credit cards, friends/family, or traditional lenders.
• Credit standing – These loans do not help build credit. Frequent use can harm credit standing over time if not repaid responsibly.

Thinking through these factors will help assess whether a cash advance aligns with your financial situation and provides the right short-term solution.

Alternatives to High-Cost Cash Advances

Due to the steep fees and interest rates on cash advances, consumers should consider lower-cost financing alternatives before applying for one:

• Negotiate with creditors – Contact creditors directly to explain the situation and request extended payment plans. Many may offer options to avoid late fees.
• Borrow from family or friends – For those with close social connections, a small personal loan with flexible terms can bypass the high costs of a formal cash advance.
• Credit card cash advance – While still costly, credit card cash advance fees and APRs are lower than other short-term loans. Only usable if you have available credit.
• Traditional personal bank loan – Banks or credit unions offer installment loans with longer terms, lower APRs, and fixed regular payments. However, approval is harder with bad credit.
• 401(k) or retirement plan loan – Allows borrowing against yourself with lower interest repayable over 1-5 years. Downsides include lost retirement investment gains and penalties if you leave your job.
• Peer-to-peer borrowing – Online platforms like Prosper and LendingClub allow borrowing directly from individual investors at lower rates. Limited to those with good credit profiles.
• Employer advance – Some employers provide salary advances or loans in cases of hardship. This avoids third-party fees and interest.
• Hardship assistance – Local non-profits, charities, churches, or government programs may provide emergency grants or loans to cover essential expenses.

The feasibility of these options depends on your specific financial situation. But exploring them first before high-cost cash advances can potentially help meet needs at a lower long-term cost.

Tips for Responsible Use of Cash Advances

If you do take a cash advance loan, following these practices can help ensure responsible use:

• Take only what you can realistically repay with your next paycheck while still covering normal living expenses. Avoid temptation to over-borrow.
• Understand the total repayment amount with fees and interest before accepting the loan. Ensure you can repay this full amount by the due date.
• Do not plan to take out a new cash advance to repay a previous one. This leads to an endless debt cycle at great cost.
• Mark the repayment due date on your calendar and budget accordingly to have the funds available, avoiding late fees.
• When possible, make repayments earlier than the due date to minimize the overall interest costs.
• Have a plan to eventually eliminate any reliance on these short-term loans through better budgeting and spending practices.
• Avoid using cash advances for discretionary purchases. Reserve for true emergencies like medical bills or emergency car repairs.
• Review your credit report regularly to check for any inaccuracies if you do experience issues with repayment and collections. You can dispute errors to protect your scores.

Following these tips will lead to smarter, more responsible use of cash advances only in cases of true need. Have a plan for repayment in place before borrowing to avoid escalating fees and interest costs.

Key Takeaways

• Cash advances provide quick cash before payday but come with very high fees and interest, making them expensive ways to borrow.
• Approval is fast and funding deposited quickly into bank accounts, but loans must be repaid in full in 2-4 weeks to avoid growing fees.
• Missed payments lead to aggressive fees and collection tactics. Have a realistic repayment plan in place before borrowing.
• Consider lower-cost alternatives like negotiating with creditors, borrowing from family, or using traditional lenders when possible.
• Use cash advances only as a last resort for true emergencies and budget to repay on time. Avoid debt cycles rolling over loans.
• With responsible use for temporary cash shortfalls and prudent repayment, cash advances can serve as an occasional emergency funding bridge.

Frequently Asked Questions

Q: How long does it take to get funds from a cash advance?

A: Approval is usually instant or within 24 hours, with funds deposited to your bank account by the next business day in most cases. This provides near-immediate cash.

Q: Where can I get a cash advance?

A: You can apply for an advance online, over the phone, or at a lender’s retail storefront location in permitted states. Many lenders now offer mobile apps for easy access.

Q: Can I get a cash advance with bad credit?

A: Yes, cash advance lenders typically do not run credit checks or base approval on credit scores. Even borrowers with very low scores can qualify as long as they have steady income.

Q: How much does a typical cash advance cost?

A: Expect fees of 10-30% of the loan amount plus daily interest around 2-5%. In total the repayment amount is commonly double or triple the original loan principal.

Q: Are cash advances legal and safe to use?

A: Reputable cash advance lenders are legal in many states when operated in compliance with state laws. Review licensing and protections offered in your state to ensure safety.