In moments of financial need, many people tend to search for instant solutions to cover these unforeseen expenses and events. Among the multiple quick solutions for these are cash advances and payday loans. Even though they may be similar at first, they each have different implications and characteristics. Cash advance vs. payday loan: what’s the difference? It is important to know and understand the differences because they can affect your decision.
Hence, if you would like to learn about which financial option meets your needs and situation, keep reading to find which area and situations cash advances or payday loans can be considered.
What is Cash Advance?
A cash advance allows you to access funds by borrowing against your available credit card balance. You are making use of your credit card to access money instead of purchasing something.
Moreover, this service is usually used when you need fast cash and there are no other available options. However, cash advances usually come with high-interest fees and rates but are still a convenient way to access funds quickly.
How Does It Work?
To get a cash advance, credit card holders can choose between visiting a bank or financial institution or using an ATM to withdraw cash with their credit card.
Moreover, the amount you withdraw will be included in your credit card balance and is liable to cash advance APR. Unlike a normal credit card purchase, cash advances do not come with grace periods.
In other words, the interest rates will begin to increase immediately. In addition to this, cash advances might also accumulate transaction fees as well.
Pros and Cons of Cash Advance
Here are the benefits and drawbacks of making cash advances:
Pros
- Immediate or instant access to funds.
- A credit check is not required.
- Flexible repayment terms.
- Convenience.
- Averted overdraft fees.
- It is a good option for emergencies.
- Can be accessed through bank tellers and ATMs.
- Applying for a new credit product or loan is not required.
Cons
- Results in a cycle of debts.
- High interest rates.
- This can result in deeper debts if not properly managed.
- No grace period.
- Applied transaction fees.
- Limited amount.
- Negatively affects your credit card balance.
What is a Payday Loan?
A payday loan is a form of short-term loan that is usually meant to be paid back by one’s next payday. Generally, it is small in amount and suitable for people to handle their expenses until they receive their next paycheck. Meanwhile, payday loans are usually quick in approval and need minimal documentation. This is one thing that makes it a good option for borrowers in need of instant cash.
How Does It Work?
To qualify for a payday loan, borrowers typically need to supply a valid bank account and documentation of steady income. After you apply, you will get a check or a lump sum of cash, which you will have to pay back when you get your next payday.
However, this usually comes with fees and interest. Apart from this, the lender might need a postdated check or access to your bank account as a form of collateral. Therefore, if you are not able to pay back the loan on time, you might face additional interest and fees, resulting in a debt cycle.
Pros and Cons of Payday Loans
Here are the benefits and drawbacks of taking out a payday loan:
Pros
- No credit check is required.
- Flexible amounts.
- Quick approval.
- Minimal documentation is required.
- Can be accessed from different lenders.
- Easy and quick access to cash.
- Best for short-term financial needs.
- Straightforward application process.
Cons
- This can result in a cycle of debt.
- High-interest fees and rates.
- Small loan amount limitations.
- Short repayment terms.
- Can result in serious financial problems.
- Predatory lending practices.
- Negative impact on credit score.
- Might require a postdated check or access to your account.
Cash Advance vs. Payday Loan: What’s the Difference?
Before choosing cash advances or payday loans, it is important to compare, and to do this, you need to know the differences between these two loan types. To make this easier for you, here is a table illustrating the differences between cash advances and payday loans:
| Aspect | Cash Advance | Payday Loan |
| Lending Source | Credit card | Payday lenders |
| Approval Process | Requires an ID and credit card | Requires bank account and proof of income |
| Fees | Transaction fees | Processing fees |
| Impact on Credit Score | It can affect one’s credit score through the utilization. | It can affect one’s credit score if not paid on time. |
| Repayment Terms | Added to monthly payment and credit card balance | Due by the next payday |
| Loan Amount | Depends on the credit card limit. | Usually small amounts and less than $1,000 |
| Interest Rates | High APR | Extremely higher APR |
| Grace Period | No | No |
| Approval Time | Instant | Within a few hours or the same day |
| Credit Check | Not required | Usually not required |
Now that you know the aspects of differences between these financial options, you can know which one to choose that meets your needs financially.
How to Choose Between Cash Advance vs. Payday Loan
Many people ask this question when they are stuck between choosing between a cash advance or a payday loan.
Nevertheless, if you are experiencing difficulties deciding, then you can start by considering the urgency of your needs, your repayment ability, and your borrowing cost. You will find cash advances suitable if you need instant access to money with low-interest fees and have a credit card as well. However, keep in mind that this usually leads to accruing interest rates and high fees.
On the other hand, payday loans can be suitable if you do not have a credit card but need cash urgently. In the meantime, you need to be ready to handle the risk of falling into a debt cycle and high costs. It is important to review your financial situation and needs carefully or choose other alternative options like applying for financial assistance programs or borrowing from family and friends.