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Cash advances can seem like a helpful solution in a pinch, but they often come with high fees that can quickly lead to debt. Generally, it's best to avoid a cash advance whenever possible. Here's how to calculate how much a cash advance will cost you and what alternative options are available.
What Is a Cash Advance?
A cash advance is essentially a short-term loan from your credit card. When you get a cash advance, you're borrowing against your existing line of credit. Typically, the interest charged on cash advances is greater (sometimes much greater) than the interest you'd pay for purchases. The amount of available credit you have left on your account determines how much cash you can borrow from your credit card, although sometimes it's capped at a percentage of your limit.
There are several ways you can get a cash advance:
- At an ATM: The process is similar to using a debit card, except you use a credit card instead. You'll need to know your credit card PIN or get it from your card issuer to get a cash advance this way.
- Convenience check: Some credit cards come with convenience checks, which are checks you can write to yourself. You then cash the check or deposit it into your account.
- In person: You can ask a bank teller for a cash advance on your credit card. You'll need to provide your credit card and a valid I.D.
- Through your bank's app: Your bank may allow you to access a cash advance by transferring money from your credit card account to a checking or savings account.
A cash advance can be used for any desired purpose. For example, you might encounter an unexpected expense or financial emergency and need cash quickly to cover it. Cash advances are also easy to get: Unlike many other types of loans, you don't need a credit check to get a cash advance because it's drawn from your existing account. If you can't wait for a traditional loan to be approved and disbursed, a cash advance could be a tempting option. But consider the high costs first.
How Much Does a Cash Advance Cost?
The biggest downside to getting a cash advance is that you'll likely end up paying more in interest and fees than you would if you instead used your credit card (or another payment method) to make the purchase. When it comes to cash advances, there are a few different costs to know about:
- Cash advance fee: This is usually a percentage of the total amount that you're borrowing, typically 3% to 5%, although sometimes it's a flat fee.
- High interest rate: This is the cost or amount you're charged for borrowing money. Interest rates on cash advances are often much higher, and if you don't pay it back quickly, interest charges can greatly increase the amount you owe
- No grace period: You'll start paying interest on the day you take the advance (and beyond).
The cost of taking a cash advance can quickly add up. For example, if you borrow $1,000 with a 25% APR and pay it off in equal payments over 12 months, you'd pay more than $140 in interest. And not only will you pay interest on the original amount you borrowed, but you'll also be responsible for paying any fees charged. In short, the cost of cash advances is a high price for quick access to cash.
Despite the high costs, there are some situations where getting a cash advance can fill a need. For instance, a cash advance can be a lifesaver if you need access to cash on short notice and don't have any other way to get it. It's also a step up from other types of loans, including payday loans. Use cash advances for true emergencies where there's no other less expensive option (for example, if your car breaks down while you're out of town, and the tow truck company only takes cash).
Just be sure you understand the terms of your loan and how much it will cost you before you agree to anything, and only borrow as much as you absolutely need.
Consider These Alternatives to a Cash Advance
Cash advances seem convenient, but the cost to borrow is high enough that it's worth looking at other options:
- Your emergency fund: The best option is having money set aside for emergencies so you won't have to turn to cash advances at all.
- Friend or family loan: Ask a friend or family member to lend you the money.
- Get a side hustle: Some give payouts the same day or the next day.
- Personal loan: This usually involves more paperwork, and it may take longer to get your money, but the interest rates are generally much lower.
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The Bottom Line
Cash advances can be a helpful solution in a pinch, but they can be expensive, with interest rates and fees that quickly add up. It's essential to weigh the costs against the benefits before going this route and only use a cash advance if other, better options are not available. If you decide to get a cash advance, make sure you have a plan to pay it back quickly so you don't end up in debt.