Whether you are working full time for someone or have started your own business, you may experience an emergency expense, or you’re short of cash to quickly settle your current bills. For that reason, you may consider a cash advance or payday loan, as these are the fastest funding sources one can think of during emergencies.
However, you don’t know which of the two is the most favorable for you. The two lending alternatives are similar in that they are short-term borrowing that allows you to access money quickly and with less loaning requirements and avoid running out of money, especially when working on a startup.
Nevertheless, there are several differences between them, and it’s imperative to understand to make the best decision. Failure to gain that insight, you will find yourself in a worse situation than you were before.
Closer Look at Short-Term Lending Options
A cash advance is a loan option provided by credit card issuers; therefore, you’re allowed to withdraw funds via your credit card at a bank or ATM. Basically, you’re using a credit card to buy cash to sort your emergencies instead of purchasing goods and services.
Although the credit line is convenient, it’s costly, and the credit card companies will not allow you to withdraw your entire allocation in the form of a cash advance. They cap it at a certain level, thus allowing you to use it only when you have an emergency.
A payday loan is principally an advance that you receive based on your expected salary or wages. This lending option from https://www.bugiscredit.sg/ allows you to access your salary before the payday. Therefore, you’re able to attend to a blown car tire immediately it happens since you can access your pay earlier.
It is the perfect option since you pay it within a matter of days, but its cost is high. However, failure to pay it promptly when you receive your salary, the interest rate will cost you severely.
Why Is Cash Advances Expensive?
As stated above, cash advances are easy to access; however, it is among the costly method of getting money. There are various charges behind cash advances. They include;
Cash advance fees; is imposed by your card issuer. It might be a flat fee of $5-10 per cash advance. Another company may have it in a percentage form with a minimum amount of $10 or 3%, whichever is greater.
Bank or ATM fees; the financial institution handling your transaction will definitely charge a certain amount.
Interest; the issuer charges you interest when you use the card to make purchases or cash advances. It is higher on cash advances than on purchases. Further, it begins immediately you receive the cash advance since there’s no grace period, unlike when you make purchases.
Why Is Payday Loan Expensive?
Payday loans are also expensive since they target individuals with poor credit scores. The credit facility is easy to process since it has fewer requirements as compared to a standard loan.
However, it has a high interest and is likely to create a dangerous cycle of debts since you may borrow a new loan to pay off the initial one. Thus, payday loans can drain your finances and push you ever deeper into debt and poverty.
In theory, you may apply for a small-dollar loan of $100-1500 and promise to pay it in two-week and a single lump payment. However, based on your state, the interest rate may go up to 400%. On the other hand, the interest rate on a standard personal loan ranges between 4%-36%, while the credit card interest is 12-30%. Thus, the loan can be slightly cheap or expensive based on where you live.
Differences between Cash Advances and Payday Loans
- A cash advance is a percentage of your credit limit and is capped by the credit card issuer. Payday loans range between $100 and $1000 and depend on the state where you reside.
- The interest of cash advance begins immediately, but you carry the debt for an extended period if you wish. Payday loan interest also starts immediately; however, it has to be paid in a fixed timeframe. The lender may require you to pay it in the next payday.
- With a cash advance, the fee is paid upfront. Therefore, you may pay a fee of 5% or $10 on the amount you borrow and a cash advance interest of 24% APR. On the payday loans, you will be charged an upfront fee on the amount you borrow. The charge maybe $15-$30 for each 4100 you receive. The APR is 400% since the loan is mostly payable within two weeks.
- You can take a cash advance today and pay it back the following, thus accruing a little interest since the interest is pegged on how long you’re willing to carry the debt. However, with payday, you pay a set amount of interest regardless of when you repay your loan.
- You need prior approval by your credit card for cash advances; however, you only need an ID and bank account for a payday loan. Therefore, payday loans don’t conduct in-depth credit checks; hence, making it easier for you to access payday loans than cash advances.
Whether you are opting for a cash advance or payday loan, you need to consider the interest rates and fees before taking a short-term loan. Failure to take caution, the decision will trap in a cycle of debt. You may find yourself taking a second or third loan to pay the first one.
You can choose a credit card with the same interest rate for both cash advances and purchases if you’re planning to use the cash advances features more.
The Bottom Line
Both cash advances and payday loans are essential ways of overcoming your emergencies. A cash advance is a loan you receive from your credit card issuer. Its interest is higher than the fees you pay when you make purchases.
On the other hand, payday loans are the cash you receive from a lender in anticipation of your wages and there are many high acceptance payday loans direct lenders online to choose from. Both loans are short-term and unsecured to settle an emergency. However, it would help if you made the right financial decision when selecting either of the two options.