When facing unexpected financial challenges, many choose short-term borrowing options like cash advances and payday loans. These options provide immediate access to funds but differ in structure, repayment terms, and associated costs.
In this blog, we differentiate between cash advance vs payday loan, discuss the pros and cons of each, and help you determine which option is better suited for your needs.
cash advance vs payday loan
| Feature | Cash Advance | Payday Loan |
|---|---|---|
| Source | Credit card, employer-provided program, mobile app | Payday loan lender |
| Loan Amount | Varies depending on credit limit or program (typically $100-$1,000) | Typically small amounts ($200-$500) |
| Repayment | Repaid over months with interest and potentially fees | Due on your next payday (usually within 2 weeks) |
| Interest Rates | Varies, typically lower than payday loans (15%-30% APR) | Very high (300% – 600% APR) |
| Fees | May have transaction fees and APR interest | Often have additional fees (origination, late, rollover) |
| Credit Check | Usually required for credit card advances, not always for employer programs or apps | Not always required, can be based on income verification |
| Impact on Credit Score | Can negatively impact score if not repaid on time | Can significantly damage credit score due to high fees and interest |
| Availability | Widely available through credit cards or apps | Limited availability, often predatory lenders |
| Best for | Short-term emergencies, unexpected expenses | Not recommended due to high costs and debt trap risk |
What is a Cash Advance?
A cash advance is a loan for a short term from a financial institution or credit card company. It allows you to borrow a portion of your available credit limit in cash. Here are the pros and cons of cash advances:
Pros of Cash Advances:
- Quick access to funds: Cash advances provide immediate access to funds, making them suitable for emergencies or urgent financial needs.
- Convenience: Obtaining a cash advance is often convenient if you have a credit card. You can withdraw the funds/amount from an ATM or visit a bank to get the cash.
- No separate credit check: Cash advances utilize your available credit, so there is typically no need for a particular credit check.
Cons of Cash Advances:
- High-interest rates: Cash advances often have higher rates than other credit forms. The interest starts accruing from the moment you withdraw the cash.
- Additional fees: In addition to high-interest rates, cash advances may incur transaction or cash advance fees, increasing the overall cost of borrowing.
- Negative impact on credit utilization: Utilizing a significant portion of your available credit through a cash advance can negatively impact your credit score, as it increases your credit utilization ratio.
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What is a Payday Loan?
A payday loan is a loan for a short term provided by specialized lenders, usually to be repaid on your next payday. According to the latest data from CFPB, approximately 12 million Americans are estimated to borrow payday loans yearly. Here are some significant pros and cons of payday loans:
Pros of Payday Loans:
- Quick approval and funding: Payday loans are known for their fast approval process. Once approved, funds are usually disbursed on the same day or within a few business days.
- Minimal eligibility requirements: Payday lenders typically have lenient eligibility criteria, making it easier for individuals with poor credit or little financial history to qualify.
- No collateral required: Payday loans are unsecured, so you don’t need to provide collateral such as property or assets to secure the loan.
Cons of Payday Loans:
- High-interest rates and fees: Payday loans often come with high-interest rates and additional fees, making them an expensive borrowing option.
- Short repayment period: Payday loans typically require repayment within a few weeks, often on your next payday. This short repayment period can lead to financial strain if not managed carefully.
- Potential debt cycle: If you cannot repay your payday loan within the agreed time, consider extending it or getting another loan to settle the first one. However, this could lead to a cycle of debt that is hard to break.
- Restrictions: In twelve states, payday lending is illegal, while in eighteen states and Washington DC, there are restrictions in place.
Also Know About: Is Beem Cash Advance Legit?
Cash Advance vs Payday Loan: What’s the Difference?
The main differences between cash advances and payday loans are their source, repayment structure, and eligibility criteria:
- Source: Cash advances are obtained through credit cards or financial institutions that offer this service, while specialized payday lenders typically provide payday loans.
- Repayment Structure: Cash advances are typically repaid over time as part of your credit card balance. On the other hand, payday loans require a lump-sum repayment, usually on your next payday.
- Eligibility: Cash advances rely on your available credit, so eligibility is based on your credit card limit and creditworthiness. Payday loans often have more lenient eligibility criteria, focusing on factors such as income and employment rather than credit history.
Also Know About: How Does Beem Cash Advance Work
Cash Advance Vs Payday Loan: Which one is better for me?
Choosing between a cash advance vs payday loan depends on your financial situation and needs. Consider the following factors when making a decision:
- Immediate Financial Need: If you need direct access to cash and have a credit card with available credit, a cash advance might be a viable option. It provides quick access to funds, especially for emergencies.
- Repayment Capability: Evaluate your ability to repay the borrowed amount. Cash advances allow repayment over time, while payday loans require a lump-sum refund. Consider your financial circumstances and choose an option that aligns with your repayment capabilities.
- Interest Rates and Fees: Compare both options’ interest rates and fees. Cash advances often have higher interest rates and additional fees. At the same time, payday loans may also come with high-interest rates and fees. Calculate the total cost of borrowing and choose the option that is more affordable for you.
- Credit Impact: Consider the impact on your credit score. Cash advances can increase your credit utilization ratio, negatively impacting your credit score. Payday loans typically don’t affect your credit score if repaid on time, as they are often not reported to credit bureaus.
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Also Know About: Beem Cash Advance Requirements
Conclusion
When faced with financial challenges and the need for immediate funds, understanding the differences between cash advance vs payday loans is crucial. Cash advances offer quick access to cash but come with high-interest rates and fees. At the same time, payday loans provide fast approval but require a lump-sum repayment with high costs. Evaluate your financial situation, repayment capability, and associated costs before deciding. Exploring other alternatives, such as personal loans or seeking financial assistance, is advisable before opting for short-term borrowing options.
Beem can help you find, compare options and choose the best personal loan for you to meet your needs.
FAQs
1. Can I Obtain a Cash Advance or Payday Loan With Bad Credit?
Cash advances and payday loans often have lenient eligibility criteria, making them accessible to individuals with poor credit. However, checking with specific lenders for their credit score requirements is essential.
2. Are Cash Advances and Payday Loans Suitable for Long-Term Borrowing?
Cash advances and payday loans are designed for short-term borrowing needs. They are not recommended for long-term financial solutions due to their high costs and potential for debt accumulation.
3. What Are the Alternatives to Cash Advances and Payday Loans?
Other options exist besides cash advances and payday loans if you need to borrow money. You can consider getting a personal loan from a bank or credit union, asking friends or family members for help, or seeking financial assistance from nonprofit organizations. These alternatives often have better terms, lower interest rates, and extended repayment periods.
