What Is A Cash Advance And How Does It Work?

Whether you're facing a tight financial squeeze or you’re suddenly hit with an emergency expense like a car repair, a cash advance can be a lifesaver. Essentially, it's a type of loan that lets you tap into your credit card limit for cash via an ATM or bank. But, while it offers convenience in times of need, it can come at a high cost. So, before you opt for a cash advance, it's crucial to understand how it works and to explore alternative options.

What Is A Cash Advance On A Credit Card?

A cash advance is a short-term loan that allows you to use your credit card account to borrow money quickly. It lets you borrow up to a certain percentage of your credit limit and pay the loan back in installments, plus interest, which begins building right away. 

Credit card cash advances typically carry a higher APR compared to regular purchases, and there's usually an additional fee involved.

How Does A Cash Advance Work?

You can think of a cash advance as a way to get cash from your credit card instantly. Unlike regular credit card transactions for which you pay later, a cash advance means immediate cash. If your credit card offers this feature, obtaining one is usually pretty straightforward.

When it comes to getting a cash advance, you have several options. One option is to use your credit card at an ATM, entering your PIN as you would with a debit card. However, it's important to note that there may be limitations on the amount you can withdraw, and additional fees may apply.

Alternatively, your credit card issuer might provide convenience checks, which function similarly to regular checks. However, the funds are drawn from your credit card's line of credit instead of from your checking account. You may also have the option to visit a bank branch in person. If you choose this method, make sure you bring along your identification.

Breaking Down The Costs Of A Cash Advance

While cash advances are convenient, they usually come with fees, service charges, and high APRs.

• Cash advance fee: Credit card issuers typically charge this fee to cover the costs and risks of offering cash advances. The average fee is 5% of the advance or $10, whichever is higher.
• ATM or bank fee: This fee is generally charged for using an ATM not owned by your bank. The exact fee amount will depend on your bank, but is usually $3 or $4.
• Annual percentage rate (APR): Cash advance APRs work differently from regular purchase APRs. They don't have a grace period, meaning interest starts building up right after you get the cash advance. These APRs are often higher, typically ranging from 17.99% to 29.99%. So, it's important to be aware that once you request a cash advance, you'll start accruing interest immediately.

Example: What Is A $1,000 Cash Advance Going To Cost You?

To illustrate the cost of a cash advance, let’s say your credit card has a 28% cash advance APR and charges a 5% fee or $10, whichever is less. So, if you take out a $1,000 cash advance and plan to repay it within a year, here’s what it might cost:

For a $1,000 cash advance, you'd pay around $206.25 in total — $54 in fees and $152.25 in interest.

Pros And Cons Of Cash Advances

Before deciding whether to take a cash advance, it’s important to weigh the pros and cons to understand the potential benefits and drawbacks.

Alternatives To Cash Advances

When you need cash, remember that cash advances aren't your only option. Although alternatives may not be as speedy or convenient, they often offer more benefits, which can make them a preferable choice.

Personal Loans

A personal loan offers flexibility for a wide range of expenses. To secure a personal loan, start by researching lenders like banks, credit unions, or online options to find one that fits your needs. Once you've found a potential lender, you'll need to fill out an application to get pre-approved. They'll check your credit, so it's crucial to compare terms from different lenders to find the best offer.

• Pros: Personal loans usually have lower interest rates, and lots of them don't charge extra fees when you apply or start the loan.
• Cons: Getting a personal loan might take a while because you have to fill out paperwork and look around at different loans to find the best terms and rates. So, it might take a little longer to get the money you need.

Cash-Out Refinances

If you already have a mortgage and have built up equity in your home, you can consider a cash-out refinance for a larger amount. Essentially, with a cash-out refinance, you'll receive a payout for the difference between your existing loan and the new one. But keep in mind, you usually need to leave at least 20% of your home's value untouched. This might not work for everyone, especially if you haven't built up much equity.

• Pros: Refinancing for more money can mean lower interest rates and the ability to borrow larger sums of money.
• Cons: This option also comes with closing costs, and if you can't keep up with the higher mortgage payments, you could face foreclosure.

Emergency Funds

It's a good idea to have an emergency fund set aside for unexpected expenses like car repairs or medical bills. Experts usually suggest saving up enough to cover three to six months' worth of your basic living expenses.

• Pros: Having an emergency fund brings peace of mind and financial security. Plus, there are no fees or interest rates to worry about when you dip into it during tough times.
• Cons: Using an emergency fund means you're using your own savings, which can reduce the amount of cash available for future emergencies or planned expenses, unlike a cash advance where you receive immediate funds without using your savings.

Borrowing From A Friend Or Family Member

When you're in a tight spot, borrowing from a friend might seem like a solution, but it could strain your relationship. Consider not only the potential interest savings but also the personal dynamics involved. Even if you pay them back as promised, your relationship might still be affected.

• Pros: No need to worry about fees, and you might avoid paying interest altogether, depending on the agreement you make.
• Cons: Borrowing from family members can strain relationships and potentially place your loved ones in financial hardship.

What Is A Cash Advance? FAQs

To help you understand cash advances better, check out these commonly asked questions.

Does a cash advance impact my credit score?

Yes, getting a cash advance can lower your credit score if you miss payments. Additionally, it can raise your credit utilization, which is the amount of your credit limit you're using compared to the total. This matters because high credit utilization suggests to lenders that you might be risky to lend money to.

When is a cash advance a good idea?

A cash advance offers quick access to funds when alternative options aren’t available. However, fees and high interest rates can quickly snowball. If you’re in a bind and a cash advance is your only option, it’s important to have a plan for quick pay off if a cash advance is your only option to avoid racking up debt.

How do I get a cash advance?

You have three options for getting a cash advance: using convenience checks, withdrawing from an ATM, or visiting a bank in person. The most common method is using an ATM. Convenience checks, provided by your bank, can be mailed to you. Some banks allow cash advances in person at their branches.

How do I pay back a cash advance?

You can repay a cash advance like your credit card bill, either online, through a mobile app, by phone, or with a mailed check. Make sure to understand your credit card issuer's terms to know how payments are applied. Often, you must first clear the total minimum payment before paying down the cash advance. Since interest starts accruing immediately, it's best to repay the advance quickly to minimize interest owed.

The Bottom Line

Sometimes, you might have to resort to getting a cash advance with your credit card, especially in emergencies. But before you go for it, take a moment to consider all your options. If you do decide a cash advance is your best bet, make sure you know exactly how much it will cost and come up with a plan to pay it off as soon as possible.

Understanding your finances can minimize costly borrowing. Simplify your spending and saving when you manage your finances with the Rocket Money^SM app.