If you already have a credit card, getting a cash advance is very easy.
But it can also be super expensive. Before borrowing money from your credit card, make sure you understand how a cash advance works, how you can minimize cash advance fees, and whether there are better alternatives.
How do cash advances work?
A cash advance is a way to borrow money from your credit card company. You can initiate your cash advance online, through cash advance checks sent with your credit card statement, or through an ATM.
To withdraw money from an ATM using a cash advance, you will need the PIN associated with your credit card. You will then need to agree to all cash advance fees before you can get your money. You may also incur ATM fees.
If you’re starting the cash advance online, you can set it up to be deposited directly into your checking account via an ACH transfer. You’ll also need to agree to any cash advance fees before you get your money this way.
Another way to get a cash advance is to use convenience checks that your credit card issuer sends with your statements. These may be provided with every statement, every few months, or once a year upon renewal, depending on your credit card issuer. As soon as you sign and submit the check, you agree to the terms of the cash advance.
Your cash advance limit may be lower than your credit card purchase limit. Check your documentation or contact your card issuer to find out your credit limit for a cash advance.
What makes credit card cash advances so expensive?
Cash advances are an extremely expensive way to borrow, even more expensive than using your credit card to make a purchase. Cash advances come with additional transaction fees and higher APR than regular credit card purchases. And that APR starts accumulating immediately unlike credit card purchases.
The first expense to consider is transaction fees. These fees are usually between 3% and 5%. Typically, there is a minimum charge of around $10.
Let’s say you took out a $250 credit card cash advance with a 3% transaction fee, but a minimum transaction fee of $10. Three percent of $250 is $7.50, but that’s less than the minimum charge. You would therefore be charged a $10 transaction fee, even if it is higher than 3%.
But if you take out a $1,500 cash advance, 3% would be $45. Since 3% is more than the minimum transaction fee of $10, you would pay $45 in transaction fees.
Credit cards almost always have a high APR. But each card actually comes with at least two APRS: one for purchases, then another for cash advances. The cash advance APR is almost always higher.
This is true even if you sign up for a card with a 0% introductory APR. This 0% rate generally applies for a fixed period, say 12 months, and generally only applies to credit card purchases or balance transfers. It generally does not apply to the APR for cash advances.
Interest begins to accrue immediately
Not only do credit card cash advances come with a higher APR, but that interest starts accumulating immediately. With credit card purchases, you’ll enjoy a grace period and you won’t pay interest if you pay your balance in full by the due date on your first statement after purchase.
This is not the case with cash advances. There is no grace period. You start owing interest the moment the money comes out of the ATM (or is transferred to your bank account). Because interest starts accumulating immediately, it becomes much more expensive to pay off much faster.
What is the average cost of a cash advance?
The cost of your credit card cash advance varies depending on the amount you borrow. To simplify this analysis, let’s say you borrow $1,000. The average cash advance fees and interest rates on a cash advance are:
3% to 5% transaction fees
On a balance of $1,000, your transaction fees can range from $30 to $50. With an APR of 24.99%, if you pay off your balance on the 30th day, you will owe approximately $20.83 in interest. If it only took a month to repay the money, the total financing costs would be between $50.83 and $70.83.
The longer it takes you to pay off the debt, the more it costs. Credit card interest is usually compounded daily. This means that what seems like a manageable amount of interest at first can quickly spiral out of control.
How to reduce the cost of a cash advance
A credit card cash advance is an expensive way to borrow, and one that you should avoid if possible. But if you find yourself in a situation where you absolutely need it, there are several ways to slow the bleeding. These are simple concepts, but they may not be easy to implement.
Minimize the amount you borrow
The fees and interest on your cash advance are a percentage of the amount you borrow. This means that one of the best ways to limit your interest and fees is to reduce the amount you borrow.
If you borrow this money to pay a down payment on a car loan so you have transportation to your place of work, maybe you don’t get the fanciest vehicle model. Instead, get something functional, safe and affordable without all the bells and whistles.
You can also try to negotiate with the dealer on the base price, which should reduce the amount required for a down payment by the bank.
Anything you can do to reduce the amount you borrow through a credit card cash advance is worth considering.
Repay your cash advance as soon as possible
Just trying to scrape together enough money to buy groceries until payday? Then be sure to repay your cash advance as soon as your paycheck hits your account.
Since interest is compounded daily, each day you owe money will significantly increase your amount owed, the longer it will take you to pay it off.
Cash Advance Alternatives
If you need cash fast, there are other products you might want to consider. Some are better than credit card cash advances – and some are worse.
Personal loan vs cash advance
Personal loans tend to be cheaper than cash advances if you have good credit. Unsecured personal loans don’t require any collateral, and you ideally want one with a fixed interest rate for predictable monthly payments.
If you have good to excellent credityou might expect these loans to come with a APR somewhere between 7% and 20%. If you have poor credit, however, interest rates could be even higher than cash advances.
Personal loans sometimes come with an origination fee, which is an additional fee, but is also already factored into the cost of the APR. If you take out one of these loans, the ideal is to find one without any prepayment penalty. That way, if you pay off the loan early to save money on interest, you won’t have to incur any additional expenses.
Also beware of personal loans with lump sum payments. With these loans, your monthly payment will be lower at the start, but you will only have one lump sum payment at the end. If you can’t afford the lump sum payment, you’re back to where you started – you need to borrow more money.
One downside to these loans is that they tend to have terms of at least one year, although you can find some with shorter terms. Another problem is that if you only need to borrow a few hundred dollars, most financial institutions offer a minimum amount between $500 and $1,000. So you might end up borrowing more than you need.
In many cases, a personal loan is preferable to a cash advance. But keep in mind that if you have bad credit or the interest rate offered to you is over 20%, this might not be the case. Run your own personal numbers with care.
Payday loan vs cash advance
The interest rate announced by payday loan lenders are rarely in terms of APR. If it did, it would often be over 100%.
Different states have different laws governing exactly how much payday lenders are allowed to charge, but even still, a cash advance will be considerably cheaper than a payday loan.
Borrowing money from family and friends versus a cash advance
If you are in a difficult financial situation, you can always ask a family member or friend for help. Depending on your relationship and the amount of money, they may keep the debt informal or draw up a formal contract with or without interest.
Before borrowing money from family or friends, make sure you can afford to pay them back in the near future. If you can’t, it can hurt your relationship. However, if you can find a favorable and realistic arrangement, this method is likely to be less expensive than taking out a cash advance.
Ask for help or cash advance
Take a cash advance to cover something like a utility bill? There may be a program to help you so you don’t have to borrow from your credit card company.
For utility bills in particular, there are usually two options: payment plans or charitable aid programs.
If your utility company offers you a payment plan, they may be willing to spread your current balance over several months, making repayment more feasible than paying off all of the duty in one lump sum. They can also set you up with a plan that estimates equal payments over the course of a year, so you don’t pay $20 for heat in July and $300 in January. Instead, you might get a more stable monthly bill of $150 or something.
If there is a state, government, or charitable program associated with your utility, it may have funds available to help people going through economic hardship. It may hurt your ego to apply for a program like this, but the amount of interest and main, it saves you money and helps you keep the lights on without going into unaffordable debt.
Brynne Conroy, a Pittsburgh-based writer, is the founder of the blog Femme Frugality and the author of “The Feminist Financial Handbook.” She is a regular contributor to The Penny Hoarder.
This was originally posted on The Penny Hoarder, which helps millions of readers around the world earn and save money by sharing unique job opportunities, personal stories, giveaways and more. The Inc. 5000 ranked The Penny Hoarder as the fastest growing private media company in the United States in 2017.