Cash advance vs. payday loan: What's the difference?
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- Cash advances and payday loans both provide quick access to cash.
- A cash advance may come through your credit card issuer or cash advance app.
- Payday loans tend to have higher interest rates and fees than cash advances.
When you need an influx of cash quickly, cash advances and payday loans both offer a solution. But, these two funding methods have very different repayment terms. It's crucial to get familiar with your options before jumping in.
Cash advance vs. payday loan: At a glance
Cash advances and payday loans help you get the cash you need fast. But the interest rate structure tends to make cash advances more affordable than payday loans, if you are able to pay off your balance quickly.
- Cash advance: A cash advance is a short-term loan. This option is available through your credit card issuer and cash advance apps.
- Payday loan: A payday loan is a short-term loan. Usually, you must repay the funds within a few weeks. In general, this type of loan comes with high interest rates and offers relatively small loan amounts.
What is a cash advance?
Cash advances generally come in two flavors: credit card cash advances and cash advance apps.
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If you pursue a credit card cash advance, your credit card issuer will predetermine the amount you can borrow. When you take out a credit card cash advance, interest will begin to accrue immediately.
In contrast, cash advance apps offer access to cash that you will repay when you receive your next paycheck. Generally, cash advance apps automatically collect the payments. The cost of a cash advance through an app varies greatly from platform to platform. Some apps charge set fees. Other apps allow you to leave a tip instead of requiring you to pay a set fee.
"Cash advances are unsecured loans, therefore there is no need to put up any security in order to get the money," says Matthew Meehan, CEO at Shield Advisory Group.
Examples of secured loans include mortgages, where your house is the collateral, and auto loans, where your car serves as collateral.
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Example of a cash advance
If you already have a credit card, you can see if you have access to a credit card cash advance by reading the fine print of your cardholder agreement. In general, there is a cap on the size of your cash advance options and a higher APR attached.
Cash advance apps require you to sign up for the app and provide financial information before claiming your first cash advance. Typically, the amount you can borrow is determined based on the size of your paycheck. Remember, many apps automatically take payment from your bank account on payday.
A few popular cash advance apps include Brigit, EarnIn, Empower, and Dave. It's worth taking a close look at your options to find the most fee-friendly choice for your situation. Also, take a look at the advance amounts. Some of these apps have a relatively low cash advance limit when you are starting out, potentially as low as $10 for some borrowers.
What is a payday loan?
A payday loan generally provides borrowers with a loan of up to $500 with a short repayment timeline. As the name suggests, you are usually expected to repay the loan, with interest, by next payday.
The loan may give you access to the funds you need immediately. But you'll get stuck with a high APR.
"Payday loans are infamous for their extraordinarily high APRs, which are frequently in the region of 300% to 500%, and occasionally much higher," Meehan says.
"Despite the fact that payday loans provide quick access to cash, they are a risky financial option due to their high interest rates, quick repayment terms, and potential for creating a debt cycle," Meehan says. "Generally speaking, it is preferable to look into other options before turning to payday loans."
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Example of a payday loan
You can find payday loan opportunities online and in-person. Typically, the lender will ask for information about your income and your bank account details.
When you sign on the dotted line, expect to receive your funds quickly. But be prepared for a short repayment window, which might mean repaying the funds with interest in a matter of weeks. If you can't meet the repayment obligations, the lender might offer to roll the remaining balance into a new loan. While this might feel helpful at first, it's easy to get trapped in a cycle of debt with notoriously high interest rates.