Cash advances vs. payday loans: understanding the differences

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.

Definition of cash advances and payday loans

Cash advances and payday loans help you get the cash you need fast. However, 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 also a short-term loan. Usually, you must repay the funds within a few weeks. This type of loan generally has high interest rates and offers relatively small loan amounts.

What is a cash advance?

Types of cash advances

Cash advances generally come in two flavors: credit card cash advances and cash advance apps.

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 loan 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, Founder and CEO of Shield Advisory Group.

Examples of secured loans include mortgages, where your house is the collateral, and auto loans, where your car serves as collateral.

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 is 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.

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.

Where to get a cash advance

You can get a cash advance online from a credit card or a cash advance app. Popular cash advance loan apps include Brigit, MoneyLion, EarnIn, Empower, and Dave. Many creditors will let you request a cash advance online through their mobile app, but you can also visit a local bank branch to get a cash advance.

Your credit card cash advance limit can typically be found on your recent credit card statement. This amount is usually determined by how much credit you currently have available.

If you need physical cash, you can get cash advances at most banks, ATMs, or non-bank financial services companies, such as Check `n Go. The availability of non-bank financial services companies will vary based on your location. If you go to a bank, you'll likely be asked to present your credit card and government-issued ID. Furthermore, if you use an ATM to get a cash advance, try using an in-network ATM to avoid paying out-of-network ATM fees.

What is a payday loan?

Key features of payday loans

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 your 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.

Quick tip: When you need quick access to cash, the limited number of requirements to get a payday loan seems like a blessing. But the loans can put an incredible strain on your finances.

"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."

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.

Where to get a payday loan

Depending on your state, you can get payday loans online or from in-person lenders.

The following states have enacted laws that prohibit payday lenders from doing business:

• Arizona
• Arkansas
• Connecticut
• Georgi
• Illinois
• Maryland
• Massachusetts
• Montana
• Nebraska
• New Hampshire
• New Jersey
• New Mexico
• New York
• North Carolina
• Pennsylvania
• South Dakota
• Vermont
• West Virginia
• Washington, D.C.

However, if you're in a state where payday lenders do operate, be cautious of online payday lenders. Popular online payday loan lenders include Cashback Payday Loans and Cash Central. It's common for lead-generator websites to appear as if they are lenders when, in reality, they are selling your information to lenders. Sharing sensitive financial data with online information brokers poses a high risk for scams.

Cash advance and payday loan pros and cons

Cash advance pros and cons

Payday loan pros and cons

Payday loan and cash advance alternatives

The decision isn't only between a payday loan vs. cash advance. Many alternatives offer more reasonable terms with lower rates. These options include:

• Personal loans: Personal loans are long-term installment loans that typically come with more favorable rates than payday loans or cash advances. However, in looking at payday loans vs. cash advances, payday loans often provide you with funds faster. Cash advances and payday loans often give you access to funds immediately, whereas personal loans may take a few days up to a week.

• Credit cards: Similar to payday loans and cash advances, credit cards are available for those with bad credit. If you're considering a payday loan vs. a credit card, you may want to consider a 0% APR credit card. These credit cards come with an interest-free introductory period that's often worth considering if you only want to borrow a small amount.

• Borrowing from family or friends: Although the conversation may be uncomfortable, asking friends or family for a loan is usually much cheaper than borrowing from an official lender. You can avoid high interest rates and fees when you go through a friend or family member.

• Non-profit financial assistance programs: Depending on where you're located, local charities or organizations may help with short-term aid. For example, United Way has a free service called 211.org to help you find resources for paying bills, temporary housing, food, and more.

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