Cash advances are among the best ways to secure emergency cash advances for everything from unexpected auto repairs to past-due utility bills. However, many undisciplined borrowers may need help to repay, forcing a debt cycle that is hard to climb.
Fortunately, there are many tried and true strategies for managing cash advances, such as better understanding costs, avoiding borrowing much more than you need, and how to better navigate unsecured and secured loans. Keep reading to learn more about cash advances, including what they are, our top management strategies, and answers to the most frequently asked questions.
What are cash advances?
Cash advances are short-term loans offered by specialized lenders, popularized by borrowers with FICO scores in the 300 to 580 range who often have difficulty qualifying for traditional bank and credit union loans. Despite inflated interest costs, it’s best known for being a source of emergency cash.
Usually, it’s borrowed against your credit card limit. Still, today’s cash advances operate like loans with a regular APR, repayment term, and interest rate plus finance charges for an overall APR depicting the total cost of borrowing.
Benefits to cash advances include immediate access, flexibility in use, and even serving as a workplace benefit, allowing employees to cover paycheck gaps.
Examples of cash advance loans for bad credit types include credit card cash advances, payday loans, and employer-based advances, where a portion of your upcoming paycheck is disbursed via popular advance apps like Dave with 0% interest on short two to four-week repayment periods.
5 tips to avoid financial pitfalls when taking out cash advances
Here are five tips to avoid financial pitfalls when taking out cash advances:
Lack of Understanding Costs. There’s more to cash advances than paying off a balance every month. Balances comprise the principal, interest, and any extra finance charges. We recommend using an APR calculator before signing any loan agreement to better understand the cost of borrowing based on specific parameters, such as length of repayment term and interest rate.
Borrowing Way More Than Needed. With any loan, borrowing way more than you need is tempting. Remember that your requested loan amount should keep you well below a healthy debt-to-income ratio, preferably under 40%.
One of the best ways to evaluate any loan is with a loan calculator. Enter your loan amount, interest rate, repayment term, and any applicable fees or charges before determining the total repayment amount. Decide whether or not the overall cost of the loan is worth it in five seconds or less.
There are many legit, free loan calculators on the web. Type ‘loan calculator’ into your favorite search engine or visit Experian’s version, which has all the fields you need to decide.
Minefield with Payday Loans. Payday loans can be a regulatory minefield, rife with a lack of disclaimer transparency that provides insights into hidden fees, finance charges, non-payment, advertiser disclosures and other trade tricks.
Over the past decade, unscrupulous payday lenders have scorched borrowers with sky-high APRs and excessive finance charges, prompting state authorities to declare statutes that mandate maximum APRs, terms, and consecutive billing cycles payday lenders could issue.
Other types of loans include auto title and pawn shop loans, requiring collateral (e.g., vehicle or watch).
According to the Consumer Financial Protection Bureau, one out of every five title loan borrowers have their vehicles taken away from them by the lender. Four in five are renewed on the day they are due, all telltale signs that this loan product is designed for undisciplined borrowers who are okay with paying excessive rollover extension fees for the likelihood of not even paying the loan back on time.
To better understand each state’s payday loan requirements, including which states have outright banned them, visit CFA – Payday Loan Information for Consumers – Legal Status of Payday Loans by State.
Every Loan Has a Purpose. Don’t always gravitate to cash advances as your primary source of emergency cash. The best loan type depends on the kind of expense.
For example, it makes no sense to take out a cash advance to find a large e-commerce purchase over a Buy Now, Pay Later service like Affirm and Afyerpay, which offer enhanced benefits like 0% interest (promotional period) on a 6-week repayment term. On top of easy repayment, they also provide intuitive smartphone apps and compatibility with hundreds of thousands of participating e-commerce retailers, including Target, Amazon, and Walmart.
The same goes for paycheck gaps. If you’re looking to cover a quick $500, cash advances apps like Brigit may be preferable to online cash advances. They offer advances of up to $750 per paycheck, repaid on your next payday two or four weeks out.
Higher Than Average Interest Rates. Be mindful that high-interest charges are longer than a typical cash advance repayment term. For perspective, a $2,500 34% APR loan on a three-year repayment term would tally to in a total interest paid of $1520.47 and total payments of $4,020.47 with an estimated monthly cost of $111.68.
Frequently asked questions
Will a cash advance hurt your credit score?
Whether or not a cash advance will hurt credit depends on your lender’s credit bureau reporting policies. Any missed payment could be written past the 30-day mark, and utilization past 40% could turn into a derogatory mark on your report (lowering your credit utilization score).
What is the difference between a cash advance and a loan?
The main difference between a cash advance and a loan is its repayment term. Cash advances are short-term loans of up to several thousand dollars, repaid anywhere from 2 to 4 weeks (although extended periods are possible). Personal loans have much longer repayment terms, up to 72 months.
Additionally, there are more ways to take out cash advances. A credit card cash advance allows you to withdraw against your card’s available credit limit (in exchange for a flat fee or percentage of the loan amount). In contrast, merchant cash advances offer funding for a portion of daily credit card sales, and loan apps deposit funds to an account collecting direct deposits.
In any case, both adhere to maximum interest rate, term, finance, and consecutive rollover caps set by every state.
How can I borrow money and get it instantly?
There are many ways you can borrow money and get it instantly.
Three of our preferred methods are loan apps, Buy Now, Pay Later services, and online cash advances.
Loan Apps. Loan apps like Earnin offer an excellent way to address paycheck gaps by issuing a portion of a borrower’s paycheck before the next payday up to $100 per day or $750 per paycheck. All you have to do is link a valid bank account to a smartphone app and request advances, with your creditworthiness determining how much the advance is.
With these, you do not need to manage a separate loan repayment schedule, with all proceeds taken from your upcoming paycheck.
Benefits of loan apps include quick access to funds, 0% interest, no credit checks, and extra financial wellness features like overdraft protection and a dashboard that allows you to learn how you are spending your money.
Buy Now, Pay Later (BNPL). One of the best ways to fund larger ecommerce purchases is using BNPL services like Affirm, Afterpay, and Klarna. They allow consumers to make purchases using the Pay in 4 method, where payments are split into four equal installments repaid over six weeks. All you need to do is put an initial down payment of up to 25% of the total purchase price and make payments over the following three consecutive pay periods, bi-weekly or monthly.
Benefits to using the services include no interest, no fees, and complete convenience and flexibility over larger purchases over a shorter period for better budgeting.
Online Cash Advances. Visiting a loan referral network like MoneyMutual can expose you to many online cash advance opportunities. As mentioned, these are short-term loans of about $2,000 repaid in two to four weeks, offering much more advantageous terms than traditional payday, auto title, and pawnshop loans. Specifically, sub 35.99% APRs, lengthier repayment terms, and no application or prepayment penalties can be had.
What is a credit card cash advance?
Credit card cash advances allow consumers to withdraw cash from an ATM using their card up to a maximum versus their available credit limit. APRs are treated separately from regular credit card purchases, with all interest accruing immediately. To take advantage of this service, expect to pay a fee up to a percentage of the withdrawn amount or a flat rate.
We only recommend credit card cash advances for emergencies due to their high cost.
Conclusion
In short, many intelligent strategies exist for maintaining cash advances and avoiding defaulting on bad credit loans. Tired of facing a potential debt cycle due to undisciplined habits? Staying on top of effective money management strategies ensures your loan is paid off on time with no negative mark on your credit report.
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