Is a Credit Card Cash Advance Better Than a Payday Loan? – creditcards.com
- August 25, 2020
- By: Greenpath Financial Wellness
From creditcards.com, Jeffrey Arevalo, financial expert at GreenPath Financial Wellness, provides details about the pros and cons of short term loans such as credit card advances and payday loans.
In a time of financial challenge, many people look to get cash into their budgets as fast as possible. For those that don’t have readily available savings, people might consider using a credit card cash advance or payday loan.
The article looks at the options of getting quick cash using a credit card cash advance or a payday loan, both of which lets people get money into their hands very quickly.
It’s important to look at the consequences of these options, as both penalize borrowers who can’t pay back the debt promptly.
The article looks at the pros and cons of both options as well as alternatives that could help you avoid the negative effects of a high-interest loan.
What Is a Credit Card Cash Advance?
A credit card cash advance is a loan from your credit card that allows you to get instant cash, whether it’s from an ATM, a bank withdrawal, a check or another method.
The fees can be a burden. Expect to pay a cash advance fee, typically ranging from 2% to 8% with a $10 minimum – and an interest rate that’s at least a couple of percentage points higher than what you would be charged for purchases.
Be sure to understand interest rates. With a cash advance, you’re likely charged interest right away. The grace period you typically get with credit card purchases doesn’t apply.
What Is a Payday Loan?
Payday loans are structured differently. A payday loan charges an upfront fee to receive up to about $500, and more fees are added if you’re not able to pay it off within a typical two- to four-week loan term. The interest can accumulate quickly. A two-week payday loan could have a fee of $15 per $100, which equals an APR of about 400%, much higher than the rate of a typical personal loan or credit card.
This option might not be available in your state. Payday loans are allowed in more than 30 states, with several states capping the interest rate on loans.
To start the process, you borrow against an income source such as your paycheck, pension or Social Security. You write a check for the balance of the loan or authorize the lender to access your bank account.
The check or withdrawal authorization allows the lender to take the money from your account if you don’t pay off the loan in time.
What are the Pros and Cons?
Payday loans provide fast money to people with limited access to credit, but sometimes they can cause budget problems.
If you’re using a payday loan to pay your bills, you’ll need to find a way to have enough in your account to cover the loan as well as everyday expenses, says Jeffrey Arevalo, financial wellness expert at GreenPath Financial Wellness, a national nonprofit credit counseling agency in Farmington Hills, Michigan.
It’s ideal to pay it back right away, but “the reality is that, most times, that is very unlikely,” Arevalo adds. “It’s something they’ll have to keep renewing and paying back over time before they can eliminate it entirely.”
Payday loans are not meant to be long-term solutions, he says. “Ideally, if left with that option, we stress with clients the importance to pay that as soon as possible and even prioritize (it) over other debts,” Arevalo says.
Credit Card Cash Advance vs. Payday Loans
Both credit card cash advances and payday loans include upfront fees and ongoing charges if they are not paid off quickly.
Payday loans have the highest upfront charge, with a fee of approximately $15 per $100, which adds up to $75 on a $500 loan. Though it can be manageable if the loan is paid off within the loan period.
If you pay off the credit card cash advance within a few weeks, your costs should be lower than a payday loan because the upfront fee is less, and the interest won’t pile up.
It’s a good practice to use credit cards wisely. Note that the total cost for credit card cash advances can be higher than a payday loan if you’re only providing the minimum payment for your credit card balance and the interest accumulates over months or years.
Alternatives to Costly Short-Term Loans
If you’re deciding between credit card cash advances and payday loans, the answer might be neither. They’re both high-fee loans that can be costly in the long run.
It’s a smart approach for people to look at their total debt burden, and get in touch with creditors about relief options. For example, you could contact your landlord to set up an agreement to pay half your usual rent.
Getting cash can also be achieved by tapping the equity in your home. If you can’t pay it off, though, you could risk losing your home. Also, keep in mind home equity loans might be more difficult to get with economic conditions during the COVID-19 pandemic.
Fast cash could also be acquired from retirement funds. The CARES Act allows people to take up to $100,000 out of their retirement accounts without facing the usual 10% penalty if they have been diagnosed with COVID-19 or hurt by it financially. You still need to pay taxes on the withdrawal, but they could be spread out over as many as three tax years.
A retirement account withdrawal won’t affect your credit and could help you avoid more debt, Arevalo says.
The article goes on to outline other approaches for people to consider when it comes to getting a cash infusion.
Making a decision shouldn’t take place in a vacuum. Regardless of how you deal with a short-term money crunch, working with a nonprofit financial counselor is a good way to prevent it from happening again. For example, a counselor can help you figure out a budget and where you could cut expenses.
“You do have to get a handle on what you’re able to pay on a monthly basis,” Arevalo says. “And only then you can figure out what options make sense.”
GreenPath Is Here To Support You
Credit card debt support as well as understanding how to build cash reserves is available to you through a range of debt counseling services. Our financial counselors will work through your whole financial picture to help you identify options that can relieve financial stress.
Jeff Arevalo is a Financial Wellness Expert and has been with the Greenpath since 2006. He possesses a strong passion for helping others and takes great pride in providing strong financial education and effective money management tools to help make a difference in people’s lives. Jeff and his wife recently welcomed a baby boy to their family and are excited to navigate the world of parenthood for the first time.