There are few things more tempting than the offer of fast cash, especially when in an urgent financial situation. Today, you’ve got plenty of options that were not available a decade ago, such as taking a cash advance or a payday loan.
Although some people use them as a long-term solution to financial problems, these short-term loans are best suited for emergency expenses and bills. They should serve as a last resort when seeking relief during a sudden financial situation because they are expensive and can lead to a cycle of debt.
While most people interchangeably use cash advance and payday loans, they are completely different products. This article highlights the main differences between a payday loan and a cash advance so that you can make an informed decision when you want to borrow money.
What Is the Difference Between Cash Advances and Payday Loans?
Let’s break down each case.
How Cash Advances Work
A cash advance is a short-term loan you take out through a credit card. You can get emergency funds in the form of a check or direct deposit. Cash advances are great for many situations, including unexpected expenses like car repairs and bills.
Cash advances are given out within 48 hours of the application. Getting a cash advance is expensive and can lead to a cycle of debts if you don’t use the cash borrowed prudently.
The cash advance fee is 3% to 5% of the transaction or $10 to $20, whichever is higher, and the average annual percentage rate (APR) is 24%. This APR is lower than the APR for payday loans that go up to 600% in some states. Additionally, a cash advance has longer repayment terms and less flexibility in paying on time than payday loans.
Cash advances are available to credit customers at most major banks and credit unions, as well as on the internet through select app lenders. Lastly, this type of loan is based on your credit limit.
How Payday Loans Work
A payday loan is a short-term loan typically due on your next paycheck—the average term of a payday loan is usually 14 days. This loan is based on your level of income. Thus, a payday lender will use your paycheck as collateral until you get paid again.
Payday loans are high-fee loans. Their finance charge ranges between $15 to $30 per $100 borrowed, and some have up to a triple-digit APR. The APR depends on state regulations—some states have put a maximum cap on the APR, while others do not. Some states don’t allow payday lending at all.
Therefore, when you decide to take out a payday loan, first ensure that you fully understand your state’s regulations. The good thing is the Consumer Financial Protection Bureau regulates payday lending to protect customers from unscrupulous dealers and ensure financial companies treat borrowers fairly.
With payday loans, the standard amount you can borrow is $100 to $500. If you are employed, you may qualify for the loan with the help of your employer. The loans are also offered to unemployed or retired people, provided they prove a steady monthly income.
Taking out payday loans through an online lending app is quick. After approval, the lender deposits the money into the borrower’s bank account. Payday loans are usually processed the same day or within one business day.
What Are the Repayment Terms of Cash Advance vs. Payday Loans?
Cash Advance Repayment Terms
When comparing cash advance vs. payday loans, you find that both accrue interest immediately; however, a cash advance carries debt for the long term. The maximum repayment period is usually 60 days.
Payday Loan Repayment Terms
Repayment terms for payday loans are often much shorter than cash advances. Because these loans are usually repaid in one lump sum with your next paycheck, the repayment terms commonly range between 14 to 31 days.
Cash Advance vs. Payday Loans: How Much Can You Borrow?
How Much Can I Borrow from a Cash Advance?
The amount you receive is usually limited to your credit card balance. The maximum cash advance amount is $1,000.
How Much Can I Borrow from a Payday Loan?
Generally, the payday loan amount ranges between $100 to $500, but this depends on the limit set by the state legal regulations and the payday lender.
What Is Required to Take Out Cash Advance and Payday Loans?
Requirements of Cash Advance Loans
When you need a quick cash infusion, a cash advance can be a great option for you. Though, the interest rates are substantially higher than those of a credit card, so it should only be used as a last resort.
A cash advance from a bank or credit union is available to those with an account from that bank or credit union. For the best rates, apply for a cash advance from a credit union instead of a bank because credit unions don’t have administrative costs to cover.
While the cash advance requirements vary from one creditor to another, here are a few commons ones:
- Be a current bank or credit union customer of the institution giving you the cash advance.
- You should have an existing account in which you have great credit, and this account should have been open for at least one year.
- You’ll need to earn a steady income and have a stable employment history.
- Have a positive history of paying your creditors on time and in full.
You should know how much you’re borrowing, the interest applied to the loan, and any other fees for this type of loan.
Payday Loans Requirements
The requirements depend on the company giving you the loan and your state laws. In general, to get payday loans, you must:
- Be employed or have proof of a regular stream of income
- Have a valid and active checking account
- Possess a government-issued ID
- Have a Social Security Number if you’re a U.S. citizen
- Be at least 18 years old
- Have lived in the US and your current residence for at least six months
- Earn at least $1,500 monthly after-tax
What Are the Pros and Cons of Cash Advance vs. Payday Loans?
Advantages of Cash Advances
Cash advances come with numerous benefits, including:
- You can get the cash you need fast without waiting for approval from your bank.
- Since this is a loan secured by an existing line of credit, the requirements are much more flexible than they would be with a normal unsecured loan.
- Unlike other forms of credit, such as personal loans, a cash advance doesn’t require a credit check or collateral.
- If you have a good credit score, there’s a good chance you’ll receive a better interest rate than what you would get with other kinds of loans.
- You can access your cash advance at any time, even on weekends and holidays.
- You only have to pay interest on the amount you use, so there’s no risk of paying off anything you don’t need to.
Advantages of Payday Loans
Payday loans have plenty of advantages, including:
- It provides instant cash to borrowers who urgently need credit but do not qualify for traditional bank loans.
- The online application process is quick.
- The borrower receives the money within 24 hours after approval.
- The lender runs a soft credit check, and in most cases, there are no checks, no credit cards, and no credit scores required.
- It is easy to get a payday loan with a bad credit history or no credit.
What Is a Drawback of a Cash Advance and Payday Loan?
A major drawback of a cash advance and payday loan is the high cost of borrowing. This causes borrowers to pay back much larger amounts than they borrowed.
What Are the Alternatives to Payday Loans and Cash Advance?
1. Installment Loans
Installment loans are some of the best alternatives to payday loans. With Installment loans, you repay the loan in small equal sums over the course of a few months until it is repaid completely. These types of loans are generally secured against property like a home, as they can be harder for lenders to repossess than unsecured loans.
2. Home Equity Loans
Home equity loans are for somewhat creditworthy people looking to borrow against the equity they have built up in their homes. Thus, there’s a risk of foreclosure if you fall behind on payments at this level.
In addition, lenders run a hard credit inquiry before they extend this kind of loan, as borrowers who commonly get approved for this loan have an average credit score between 725 and 760. Also, home equity loans typically require a minimum down payment, which should be no less than 25% of the closing costs.
Is a Cash Advance Bad for Your Credit?
If you’re not able to pay it back, your credit score could take a hit.
Is a Loan or Cash Advance Better?
There is no definite answer, as it depends on a few factors, such as your credit limit, the amount of money needed, the repayment schedule, and more.
Nonetheless, a loan is better because it offers more repayment schedules and interest rates flexibility.
Where Can I Find Legit Lenders?
While this cash advance vs. payday loan exposition helps you choose the right product for your situation, we understand how it can be scary getting caught up in a loan shark scam. Therefore, we’re committed to providing a direct lending experience that makes borrowing straightforward and trustworthy.
We’ve built a platform that connects borrowers with credible and legit lenders. When you apply for payday loans online through the platform, you’ll receive friendly service from start to finish for free.
You don’t have to go through the tedious task of choosing the ideal lender—our system matches your details with the right one when you apply. The lender will verify your details and send an agreement to sign. The process takes only a few hours and the cash is granted by the next day.