What is a cash advance and how do they work? It might be the financial solution you need for a short-term problem.
Cash advances are an important short-term solution that many people need and use. When used responsibly, an advance can be the perfect, short-term solution for a short-term financial problem.
Before you decide whether this option is right for you, it’s important to understand what it is, how it works, the different types available, and the reasons someone might need this financial option to see them through.
Cash Advance Definition
A cash advance is a short-term borrowing option designed to help borrowers get the physical cash they need through their credit limit or next paycheck. If you have a short-term financial need that requires cash now, you could take out an advance on your next paycheck or on your available credit card limit.
Cash Advance as a Loan
A cash advance as a loan is a type of small loan designed to help borrowers get the physical cash they need for a short-term financial need. like a payday or installment loan.
In finance, getting an advance on something is usually a way to get something sooner than you normally would. In other words, a cash advance is a way to get money in advance, or ahead of schedule. It can help borrowers get cash from their next paycheck sooner rather than later so they can have the finances they need today.
Cash Advance on a Credit Card
A cash advance on a credit card gives credit card holders cash from the available limit on their line of credit. In this case, you are borrowing against your available line of credit with your credit card company.
This might be helpful when you have available credit on a card but need to use cash for certain expenses.
Just like how the digital funds you borrow from a credit card add to your credit card balance, taking out cash at an ATM will do the same thing. Interest will also be applied to the cash you take out, and you’ll need to repay what you borrowed within a certain timeframe. There may also be other fees associated with taking out an advance on a credit card.
How Does a Cash Advance Work?
Cash advance loans work much like any other loan. First, you’ll need to fill out an application that may ask for information like personal identification, proof of income, or proof of employment. Then your application will be reviewed by the lender and approved or denied. If approved, you’ll get the funds you need in cash!
- Fill out an application.
- Your application will be reviewed.
- If approved, get the funds you need in cash!
If you’re getting an advance from your credit card, you’ll first check to see if this option is available with your credit card provider, then use your credit card at an ATM to take out cash from your available credit limit. Then you’ll repay the borrowed credit in your next credit card statement.
Credit card companies may charge additional fees, higher interest rates, or have limits associated with this service. Be sure to read the terms and conditions related to the cost of the cash advance amount you have in mind in case another option may work better for you.
Types of Cash Advances
There are a few different types of cash advance options that borrowers who need money can use to get cash. For example, you could get cash from a payday loan, installment loan, title loan, tax refund advance, or a credit card advance.
Some of these options, like payday and installment loans, are even available online, though you would need to visit a store location to get actual cash in hand. Other options, like title loans, are often only available in person at a store location.
Payday Loan
A payday loan is a small, short-term loan that gives borrowers cash from their next paycheck now. This type of loan is then usually paid back on the borrower’s next pay date.
Installment Loan
An installment loan offers installment payments rather than lump sum payments on what you borrow. This payment schedule can get you the cash you need while offering a more manageable payment schedule.
Personal Loan
Personal loans can sometimes work as a type of cash advance option at certain lending locations. These loans can vary in amount and payment schedules and, depending on the lender, can sometimes be taken out in cash for your paper money needs.
Title Loan
A title loan is also a useful type of cash advance available to those with vehicle titles. These loans let borrowers use the value of their car’s title to secure loan funds that can be taken out in cash. The lender will then have a lien on your title during the life of the loan.
Tax Refund Advance
Some lenders provide a tax refund advance. Taxpayers don't generally receive their tax refund until after their taxes are filed and after the IRS has finished processing those filed tax returns. Instead of waiting all that time for your tax refund money, you could get a tax refund advance to get those funds now.
Credit Card Cash Advance
If your credit card issuer allows credit card cash advances, then you can take out cash at a bank or ATM with your credit card. Fees and restrictions may apply for each advance transaction using a credit card.
Reasons to Get a Cash Advance
There are many reasons someone might want to get a cash advance. The primary reason is to get your money sooner rather than later, like money from a future paycheck or tax refund. Another big reason is to get cash in hand for cash-only situations.
Here are a few specific examples of when someone might want to utilize this financial option.
- So you aren't late paying rent
- So you aren't late paying utility bills
- So you aren't late paying the phone bill
- So you don’t have to wait for a paycheck or refund to come in
- So you can take advantage of time-sensitive sales
- So you can avoid taking money out of a savings account or emergency fund
- So you can get funds in hand sooner for everyday expenses like groceries
- So you can avoid high overdraft fees
