In a world where online payments are the norm, having large sums of cash on your person is no longer necessary. From mom-and-pop stores to luxury boutiques, almost every retailer in the world accepts payments through online transfers, credit/debit cards or both. Sometimes, however, you may find yourself in urgent need of cash, either because a store doesn’t accept online payments or you don’t have enough money in the bank to withdraw cash. In such cases, a cash advance could be your saving grace.
What is a Cash Advance?
A cash advance is a short-term cash loan that you take against the credit limit on your credit card. It needs to be repaid within a stipulated period along with interest, just like a regular loan. Most credit card issuers allow cardholders to take out cash advances either at a bank branch or at an ATM. In a way, it’s like ‘buying’ cash with your credit card instead of goods or services.
How does Cash Advance work?
If you have a credit card, you can take out a cash advance in two ways. You can visit an ATM and directly withdraw a cash advance by using your PIN. Or you can go to your closest bank branch and get a cash advance over the counter after showing a valid form of ID.
A cash advance is just like a cash withdrawal in the sense that you get the cash immediately on the strength of your credit card. Unlike a regular cash withdrawal, however, you’re required to pay back the cash advance in full along with interest. It’s important, moreover, to remember that you cannot take out a cash advance that’s equal to your whole credit line. It’s unlikely that your bank would allow you more than a few hundred dollars as a cash advance – so it’s only helpful in case you need small amounts of cash at short notice.
Benefits of Cash Advance
A cash advance can be extremely handy if you find yourself in a situation where you need to pay in cash but don’t have any. In that case, you can simply visit an ATM and use your credit card PIN to draw a cash advance, or you can take an over-the-counter cash advance from your nearest bank branch. Anyone with a credit card is entitled to a cash advance, and you can get the money immediately without having to apply in advance. It’s also a great way for you to get a cash loan in case your credit score is poor, and your bank is unwilling to issue you a traditional loan.
Why are Cash Advances expensive?
While a cash advance may be a tempting option when you’re in urgent need of cash, bear in mind that it’s a highly expensive form of credit. A cash advance typically involves several fees, including the following:
- Cash advance fees – These fees are charged by the bank that’s issuing your cash advance. It could take the form of a flat fee in a dollar amount, or a percentage of the cash amount you take out as an advance.
- Interest – Just like traditional loans, you need to pay interest on the cash advance. This is typically charged at higher rates than regular loans. On top of that, the interest starts compounding daily the moment you take out your cash advance, without any grace period.
- ATM/bank fees – These are imposed by the ATM or your bank when you withdraw cash for your advance.
Clearly, a cash advance is an extremely expensive form of credit, and you should only opt for it if you’re in dire need of cash and have no other option.
What is a Merchant Cash Advance?
As a business owner, you may sometimes require cash on short notice. In that case, a merchant cash advance could be right for you. A merchant cash advance involves a sum of money that you’re paid up-front, in return for a percentage of your credit card sales. You continue to pay this percentage to the bank until you have repaid the cash advance plus the fees involved. This, again, is an excellent short-term loan for merchants who need cash immediately and do not have a strong enough credit score for a traditional loan. However, in case you’re not making enough credit card sales, you could end up struggling to repay your merchant cash advance and even go into debt.
