A cash advance on your credit card is a financial concept that allows you to get indebted for the amount of cash determined by your credit limit. The difference between this and borrowing money from your debit card at the ATM lies in the fact that you’re not getting the money from your account but from your credit limit. Due to the fact that it’s a debt, you have to return it with interest and this interest is often quite steep, due to the fact that you don’t have to undergo any procedure in order to raise these funds.
The reason why this is so important is due to the fact that a lot of people misuse this concept, due to their lack of knowledge on this topic. Sure, there are a lot of scenarios where this source of funding can be life-saving, however, there are often better alternatives. In order to get the most out of the concept of the cash advance, you need to know all of its benefits and downsides, prior to taking a single dollar this way. With that in mind and without further ado, here are several things about cash advance that you simply need to know.
1. Asking the right questions
Table of Contents
The first thing you need to understand is the fact that a cash advance isn’t always a bad idea. Sure, it’s a debt with a higher interest rate but provided that you are 100 percent positive that you can return the money, this shouldn’t be that problematic. Nonetheless, there are some questions that you have to ask prior to taking a cash advance. Due to the fact that this loan will have to be returned as soon as possible, the first thing that you’ll have to ask is – can I pay it back in a month? If the answer to this question is a resounding no, you would be wise to look for an alternative.
The next question you should ask is – is there another way for me to handle the situation? There is often an alternative that you haven’t considered as of yet, so do your research. The last question that you have to make is – do I really need this? Look at it this way, you’ll have to return a lot more than you’ve borrowed and do so in a relatively short time-span. This is why you need to ask yourself, just how big of a priority this particular purchase or bail-out is.
2. Benefits of instant cash advance
In the previous several paragraphs, we’ve already mentioned cash advance as a concept that’s best avoided, yet, it’s also something that brings a lot of benefits to the table. The first one is the fact that there’s no paperwork that you have to fill or a formal application that you have to make. Sure, initially, the credit card company may have some inquiries, yet, later on, you won’t have to bother with unnecessary questions and will be able to just take money at your own behest. This means that there will be no inquiries about your income, collateral or credit score.
Another issue that you have to consider is the fact that you can get funded in no time. For people without an emergency fund, this is a great way to bridge it until the next salary or make an immediate response to a situation at hand. A breakdown of an essential household appliance whose repair can’t wait for a couple of days is just one of the examples. The list of scenarios goes on and on. While it’s better to have some money stashed away for these scenarios, it’s good to have more than one solution up your sleeve.
The last thing you need to understand about cash advance loans is the fact that they are convenient and flexible and this is what makes them great for SMBs. Sometimes, you’ll have a momentary cash flow problem or a shortage in your operational expenses fund and this is probably the best way to resolve this issue. In these scenarios, however, it’s better to opt for a merchant cash advance instead. This is a similar concept, only specialized for small business owners, thus coming with a lengthy list of additional advantageous features and a much higher withdraw limit.
3. The downsides
Unfortunately, the list of downsides is fairly lengthy as well. First of all, you have the cash advance fee to worry about and the figure behind this is far from being low. In the majority of scenarios, the fee is 5 percent. This means that if you were to take $1,000 from your cash advance, you would have to pay a $50 fee. On the other hand, there are some issuers that have a flat fee, which would mean that the more you take, the less you get to pay (than you would with a percentage fee). Sadly, this has a downside, as well, mostly the fact that that it would make smaller withdrawals definitely not worth your while.
The next thing you need to understand is the fact that this kind of loan comes with a somewhat higher APR. The reason why this can be so problematic is due to the fact that even the credit cards that usually have a great interest rate (under 15 percent) often have an APR that is over 26 percent. Needless to say, it’s quite easy to see how some people would make this mistake and withdraw their cash advance without checking this first. Fortunately, now you know better.
The last thing that you may not know about cash advance is the fact that there’s no grace period. This means that the statement often comes 14 days after you’ve withdrawn the funds, with interest already counted in. Just keep in mind that it’s your responsibility to be informed about this and that when it comes to your finances, it’s no one’s responsibility to issue these warnings. So, read and understand your credit card agreement ahead of time and you should do just fine.
4. Knowing the alternatives
Now, it’s important that we start discussing alternatives that you can turn to in these moments of crisis when you would, under different circumstances turn towards a cash advance credit. Due to the fact that these are usually scenarios in which time is of the essence, we’ll skip all those processes that have a lengthy application process and require too much paperwork. We’ve already discussed the issue of having an emergency fund but this is only one of your many options. For instance, you could also ask your friends and family for a short-term loan. Most commonly, this would be a loan that you could receive without having to pay for an interest rate.
Since we’ve already mentioned that this is the money that you need straight away, going to a bank or a credit union is out of the question. However, some online funding platforms that are specializing in marketplace lending are always a safe choice. This is a quick, simple and automated way for you to receive your funding on a moment’s notice. Once you’re back on your feet, you can even use this same platform to grow your funds by becoming an investor. All in all, there’s a plethora of available options out there and both of these methods excel in speed and efficiency.
Another solution that you can turn to on short notice is selling your invoices to a factoring company. You see, there are some invoices that are just taking forever to be fully collected, especially if they’re segmented in the form of account receivables. Now, factoring companies are willing to sell some of these invoices for a tad lower value that is their full worth. About 80 percent gets paid straight away (in less than 24 hours), while the rest 15 percent get paid once the debt is collected. The fraction that they keep is between 1.5 and 5 percent of the total value, which shouldn’t be too much.
The next thing you need to consider is the business line of credit, which gives you some funds to count on but also gives you a chance to back out without taking the full sum. Remember, the less you borrow, the less you’ll have to return and it’s always good to put some breaks on your financing model. Needless to say, this is useful both for individuals and entrepreneurs.
The last thing you need to keep in mind is the fact that the concept of payday loans is getting more and more widespread than ever before and this too can become quite a handy tool. Just make sure that you plan your income and expenses better, rather than use this method too frequently. On the other hand, this could make your credit score skyrocket, provided that you’re diligent in your payment.
5. Not always cash
There are some scenarios in which your cash advance will immediately turn into a different asset, without becoming cash first. You see, there are some opportunities that one just can’t miss out on. For instance, remember when, at the end of 2017, bitcoin reached almost $19,000? People who recognized this growth at the beginning of December 2017 could have used a cash advance to invest in bitcoin, as well as return the money in just several weeks while creating an incredible profit. This example may seem a bit extreme but it’s definitely a great way to show how a cash advance can be used for one to seize and opportunity that occurs once upon a lifetime.
In the end, only by having a full picture of what’s taking place here can you fully understand what you’re getting into. Sure, this won’t save you from a bad financial decision but, even in a scenario where you do make one, you won’t be able to claim that it was due to ignorance. This is particularly true due to the fact that you have all the information available, either from consulting financial experts, reading the fine print on the agreement or looking up advice online. When it comes to finances, the more options you’re aware of, the better off you’ll be.