What You Need to Know About Taking Out Any Cash Advance
Friday, February 17, 2017
Sometimes we hear advice so often – don't do this, don't do that – that we simply know something is a bad idea and forget why it's a bad idea. Taking out a cash advance is a bad idea. If you're ever in the position in which you feel as if you have to take a cash advance, you'd do well to learn what they are, and what taking one entails.
Understand what a cash advance is. Generally, when anyone refers to a cash advance, they're talking about using their credit card to get cash. Instead of, say, paying for groceries or a book with your credit card and later paying back your credit card, you're borrowing cash from your credit card and later paying it back.
But, really, cash advances are also payday loans – you're getting a cash advance that you'll need to pay back. They're also the same thing as getting a refund anticipation loan, when a tax preparer gives you money that you expect to get back from the Internal Revenue Service. You could argue that if you go into overdraft with your bank account, you're getting a cash advance. Your bank paid something for you, and you'll have to pay them back.
In any case, all cash advances involve money being advanced to you that you will have to pay back, probably fairly quickly – usually with a fee or interest and sometimes both.
Know they're expensive. That's the main drawback with cash advances. You're borrowing money and paying a hefty amount of money to do so.
There are three main reasons cash advances are considered very expensive loans:
Hefty fees. Often when you take out a cash advance with your credit card, you'll pay either 5 percent of the money you're borrowing or $10. And you'll pay whatever's greater. So usually if you borrow anything up to $100, you will always pay $10.
High interest rates. You'll get this with credit cards and certainly with payday loans. Currently, the average credit card cash advance annual percentage rate is 22.11 percent, according to LowCards.com. And with few exceptions, it's more expensive to borrow actual cash from a credit card than to use your credit card to pay for merchandise and services. So if your APR is 22 percent when you use your credit card at the grocery store, a cash advance will likely have a considerably higher APR.
The average APR for a payday loan is almost 400 percent, according to the Consumer Financial Protection Bureau. That, of course, makes it sound as if a credit card cash advance is a bargain, but they're both pretty bad deals.
If you borrow $100 from a typical credit card, you'll pay back $22.11, plus $10, and so you're paying almost one-third of $100 to borrow $100. If you borrow $100 from a payday loan store, you'll typically be charged $15. That doesn't mean a payday loan store is better due to the ...
Short grace periods. Being charged $15 for a $100 payday loan doesn't sound bad, but you'll have less time (two weeks) to pay the money back than you would with a credit card (a month), and the real problems come if you decide you need to borrow more than $100 from a payday lender. For instance, if you borrow $400, you're probably paying back your lender $460 – in two weeks. And if your next paycheck is, say, $1,000, half of that paycheck will go back to the lender, and you'll have to try and make do until the next paycheck.
And even though you should have 30 days to pay back your credit card cash advance before it's considered late, the interest begins accruing immediately.
These are simply very expensive loans, according to Alexander Stern, a consumer attorney who has his own practice, Stern Legal Services, in Berkeley, California.
"A $1,000 loan can balloon into three times that amount given enough time and interest," he says.
Look at the fine print. There's very likely something written in the legal jargon that you won't like. You just have to find it.
"It's extremely important to go over the terms and conditions of any short-term loan with a fine-tooth comb," Stern says. "Advertisements highlight the best parts of a product and rarely discuss the worst aspects. Salespeople are similarly focused on the sale rather than what is necessarily best for a given consumer. That's why it is important that you be proactive in reading any contracts carefully before signing."
And because you'll never be able to carefully read a contract with a salesperson waiting at his or her desk or looking over your shoulder, you might want to consider taking the paperwork home and coming back the next day – or at least in an hour or two, giving yourself some time to read through everything and think about what you're doing.
Be aware of financial traps. The reality is, if your finances are shaky enough, you may feel you have no choice but to take out a cash advance. Just try to not be lulled into the idea that the financial institution lending you cash wants to help you. It wants to make money.
Chrystine Julian, an artist and poet in Redlands, California, doesn't mince words. Due to a heart attack, surgery and other health issues, she recently needed a payday loan.
"My financial life is in the toilet," she says.
She only borrowed $150 from an online payday lender and was able to pay it back for less than $20 over her original loan amount. By doing so, she avoided overdrafting her bank account and being charged a $35 fee. The cash advance, she says, worked out well for her.
But Julian says that she had to borrow another $150 shortly thereafter and logged onto the website and discovered that she was set up for a $2,500 loan. If she had taken the $2,500, she would have had several years to pay it back, at a cost of over $12,000. She instead called up the website and got them to change the setting, so she could only borrow $150.
But she marvels at the mess she might be in now, if she hadn't been strong. "I could have done that with one click," Julian says, of borrowing $2,500.
"Never forget these are predatory lenders."