Comparing Cash Advance vs Payday Loan: Understanding the Differences

Posted on April 04, 2024 by Terryl Payne

Money problems happen to everyone, and it is not surprising. Statistics speak about this. The US Census Bureau analyzed the situation in 2024, showing that 11.5% of people in America live below the poverty line [1]. And even if you manage to get by with the money you make, no one is immune to emergencies like buying new household appliances or paying for treatment.

In such situations, you can try payday loans and cash advances. Online lenders often offer these loans and boast a streamlined application process and more lenient eligibility criteria than traditional banks or credit unions. At first glance, these loans seem similar, but they are not. Let’s explore how they differ.

Difference Between a Cash Advance and Payday Loan: A Quick Comparison Table
Delving Deeper: Understanding the Fundamentals of Cash Advances
Exploring the Concept: What is a Payday Loan and How They Work
Payday Loan vs Cash Advance: Evaluating the Optimal Financial Solution
Exploring Alternatives: Options Beyond Cash Advances and Payday Loans
Concluding Remarks: What Are Distinctions Between Cash Advances and Payday Loans?
FAQ

Difference Between a Cash Advance and Payday Loan: A Quick Comparison Table

Both types of loans are short-term types of lending. At the same time, a cash advance involves using a credit card, which allows one to withdraw cash from an ATM. A payday loan is transferred by a lender into your bank account. It has high fees and is payable on your next payday.

Criteria	Cash Advances	Payday Loans
Typical Loan Amounts	from $100 to $2,000	from $100 to $1,000 or a certain percentage of the borrower’s monthly income
Application Requirements	Must have an active credit card with an available balance.	To be eligible, you need to be an adult (at least 18 years old) and have a regular source of income, a bank account, and an identity card.
Accessibility	Provided by online lenders and traditional financial institutions such as banks and credit unions.	Available through storefront lenders and online platforms.
Repayment Frequency	You can make a minimum payment and pay off the rest of the debt over months. However, this will make your debt increasingly expensive.	The loan must be repaid within 14–30 days.
Interest Rate	Typically range from 25% to 30%.	From 300% to 400% or more.
Effects on Credit Rating	Usually doesn’t directly affect your credit score, but it can increase your credit utilization, ultimately impacting your rating.	Usually not reported to credit bureaus, but defaults may be reported.
Late Payment Penalties	Additional interest, late fees.	Additional interest, impact on credit rating.
Regulation	Subject to federal regulations.	Governed by state laws and regulations, including caps on fees and interest rates.

Delving Deeper: Understanding the Fundamentals of Cash Advances

When it comes to cash advances, you typically access the funds directly through your credit card. However, there are other types of these loans, such as cash advances available via mobile apps, employer cash advances, and merchant cash advances. These alternatives have their own set of terms and conditions.

The Process of Obtaining Cash Advances Using Credit Cards

To get a credit card cash advance, you only need to visit an ATM or an issuer’s store with a car on hand. There are no application procedures you need to undergo, but knowing your PIN-code is required.

If you borrow money using a credit card, the amount you obtain is simply added to your credit card balance along with the fees. Such cash withdrawals entail funds drawn directly from an available credit line. Credit card cash advances often carry higher interest rates than regular purchases.

Ways to Get a Cash Advance from Your Credit Card

Here are a few ways:

Money Withdrawals. You can use your credit card to withdraw cash from an ATM. Cash Advance Checks. Certain credit cards might provide unique checks that can be converted into cash at banking institutions. Bank Transfers. Some credit cards allow you to transfer money to a bank account.

The Good and the Bad: Evaluating the Benefits and Drawbacks of Cash Advances

Let’s compare cash advance apps and credit card cash advances, and evaluate the advantages and disadvantages of each type of lending:

Cash Advance Apps		Credit Card Cash Advances
Pros	Cons	Pros	Cons
Instant solution to financial problems. The loan approval procedure takes minimum time.	High-interest rates. Some cash advance apps allow you to borrow money at a very high-interest rate.	Availability. You can get cash on hand without any application and verification	High-interest rates. Interest rates on cash advances are typically higher than on regular credit card purchases.
Convenience. You don’t have to go anywhere to get money. To request a loan, you open the app on your phone.	Additional commissions and fees. Additional fees may apply for using the application and for the interest rates on the loan, which can raise the cost of the loan.	Ability to cover urgent expenses. If there are no other sources of financing, no savings, and you can’t borrow money from loved ones, a cash advance can help.	Commissions. Withdrawing cash by credit card comes with high fees. This can be either a percentage of the amount or a flat fee. This depends on the terms of your credit card.
No credit check. Unlike some lending products, cash advance apps do not check your score. This means that you can get money even with a bad credit history.	Risk of addiction. Due to the simplicity and convenience of obtaining a loan, many borrowers can become dependent on it.	No waiting. You can get cash instantly.	Impact on credit history. Using a cash advance has implications for your credit history. As it increases your credit utilization, your credit score may drop.
There are applications where you can borrow money without interest or in exchange for a symbolic membership fee.	Limited amounts. Many offers are limited in quantity. Often, less than may be needed to cover emergency needs.		Increasing debt. Failure to pay your cash advance on time can result in more debt due to compound interest.

Exploring the Operations of Cash Advance Apps

A cash advance app lets you apply for and receive funds from your phone. These apps analyze your income and expenses and determine a cash advance size and whether you can receive it. Once approved, funds are sent directly to your checking account within a few minutes or hours.

The application automatically writes off the borrowed amount from your account when a salary is received. Commission and interest may also be charged.

Exploring the Concept: What is a Payday Loan and How They Work

A payday loan is usually issued for up to $1,000. By law, such loans are prohibited in some states. You can get a payday loan through in-store lenders or online.

They work as follows: A borrower contacts a store or online portal to provide proof of income and bank details. The legit lender checks the application, approves it, and issues money the next day.

However, this cash advance loan has its pitfalls that need to be taken into account:

Short repayment period. The borrower is given 2 to 4 weeks to repay a payday loan. As a rule, the payment must be made with the next pay packet. High-interest rates. Interest rates are usually exorbitant, surpassing an annual percentage rate of 400% or more. Getting caught in a debt cycle. You will likely fall into a debt cycle if you fail to fulfill your loan obligations. You will have to renew the loan and pay additional fees and interest, and the loan cost will skyrocket.

Insight into Payday Loans: Exploring the Positives and Negatives

Gain valuable insight into payday loans by exploring both their positive and negative aspects:

Pros	Cons
Quick receipt of money. The money arrives in your account the next day. Sometimes, applying at 10 am can speed up the receipt of funds in your account.	High-interest rates and fees. Compared to other loan options, payday loans entail considerable expenses.
Convenience. You don’t need to go anywhere to apply. This can be done via the Internet.	You can get trapped in debt. Lenders will charge penalties if you fail to repay the debt on time, increasing the loan cost. Prolongation also leads to an increase in commission.
There is no hard credit check. Numerous payday lenders overlook credit history, enabling individuals with low credit scores to secure loans.	The problem of regulation. Some states prohibit payday loans due to their predatory nature.
Fewer application requirements. Payday loans require minimal paperwork. Verifying your income and providing your ID and bank account number is usually enough.	Short terms. While this is good for those who don’t want a long-term commitment, it makes the loan difficult to repay.
Short-term liabilities. Since a payday loan is issued for a short period, this frees you from long-term debt.

When Would it Make Sense to Use a Payday Lender or Cash Advance Store?

Many lenders allow you to apply for a payday loan online and in-store. Whatever the option you choose, a payday loan can be a lifeline if:

emergency expenses have arisen. For example, you need to repair a car, but there is no money; there are no other options. If traditional lending sources are not available due to poor credit history.

Payday Loan vs Cash Advance: Evaluating the Optimal Financial Solution

Cash advances are often a smarter option since this type of lending has lower interest rates. For example, interest rates on сash advances vary from 17.99 to 29.99%, unlike payday loans that usually come with a flat fee of $10 to $30 for every $100 borrowed (about 400% APR or more). The cash advance fee is usually 3%-5%, while for a payday loan, you may have to pay up to 10% of your loan amount. Cash advance repayment terms are also more favorable. No specific periods are set, but over time, interest rates on сash advances can grow rapidly.

That said, don’t underestimate payday loans. They have benefits, including fast approval and receipt of money, especially for people with bad credit or a low credit score.

Exploring Alternatives: Options Beyond Cash Advances and Payday Loans

Payday loans and cash advances have high fees and can be prohibitively expensive in the long run. Therefore, it is worth considering alternative options.

Personal Loans

A personal loan takes longer to get. Moreover, only borrowers with a high credit rating can apply for it. Interest rates tend to be modest (5.99% to 35.99%), and the loans often don’t require collateral. Loan amounts typically span from $1,000 to $100,000 or even higher, while repayment periods commonly extend from one to seven years. Therefore, it is a good alternative to short-term lending.

Benefits of a personal loan:

No security deposit is required. The validity period is several years. Opportunity to borrow a large amount.

Disadvantages of a personal loan:

You need a good credit history and a stable income to get a competitive rate. Impact on credit history. Additional fees and commissions for loan processing. Personal loans have longer funding times.

Help from Friends and Family

If you are experiencing short-term financial difficulties, do not hesitate to contact a friend or family member. After all, if they have the amount you need, a loved one will not refuse to help you. However, it is worth providing a loan agreement, even with a relative. This option may be better than a credit card cash advance or payday loan.

Advantages of seeking financial assistance from relatives:

You don’t have to pay interest on the loan. No documents or good credit history are needed. Conditions are more flexible.

Disadvantages of borrowing from relatives:

The likelihood of a damaged relationship in case of non-repayment of debt. Relatives may not have the amount you need.

Peer-to-Peer Loan

P2P lending is a method of financing where individual investors provide loans to other people through online platforms. There is no financial intermediary in this case. Borrowers generally place applications and investors analyze them and decide who to lend money to. P2P lending terms are flexible, and loan interest is usually low.

Pros of P2P lending:

Fast application process. Access to various borrowing options. Opportunity to get a low-interest rate.

Cons of P2P lending:

Insufficient regulation increases the risk of fraud. Limited loan amounts. Limited consumer protection.

Secured Loan

A secured loan is when a lending institution provides money against valuable collateral. If the loan is not repaid on time, the lender will seize the pledge as compensation. Due to the guarantee, secured loans have favorable terms and are available to those with bad credit.

Advantages of secured loan:

Low-interest rates due to the presence of collateral. Opportunity to obtain a large loan amount. Possibility of improving your credit history, subject to timely repayment. Long repayment terms.

Disadvantages of secured loan:

The risk of collateral loss in case of non-payment. Lengthy verification process.

Advances from Employers

Ask your employer for a paycheck advance to avoid incurring costly debt obligations. No interest is applied since this is a portion of your future paycheck. It is usually deducted from your next salary. This is a good option in case of unexpected expenses.

Pros of advances from employers:

Quick access to money. No interest or commissions. Convenience and reliability.

Cons of advances from employers:

Limited amounts. Negative impact on relations with the employer, subject to frequent requests for advances.

Concluding Remarks: What Are Distinctions Between Cash Advances and Payday Loans?

Cash advances are generally cheaper than payday loans. Nevertheless, payday loans present a viable solution when immediate funds are necessary and you don’t have a credit card. When considering a cash advance and a payday loan, it is advisable to examine borrowing alternatives.

Pay attention to options other financial institutions offer to determine which best suits your financial situation. While payday loans and cash advances can temporarily relieve financial strain, they can potentially lead to debt accumulation. Therefore, carefully weigh the pros and cons before choosing one.

FAQ

Are Payday Advances vs Cash Advances the Same Thing?

These two are different. Cash advances are money you withdraw from your credit card balance, while a payday advance involves getting a portion of your future paycheck upfront without paying any fees.

What are the Potential Consequences for my Credit Score if I Use Payday Loans or Cash Advances?

Payday loans and cash advances can affect your credit score if delinquency occurs. If the payment occurs on time, the credit rating does not suffer. At the same time, cash advances can have an indirect effect. Since credit utilization is the ratio of credit used compared to the total available credit, taking a cash advance can elevate this parameter. This can potentially lower the individual’s credit score.

What are the Consequences of Defaulting on a Payday Loan or Credit Card Cash Advance?

Failure to pay will result in further interest and fees. Your credit history may suffer, too. Additionally, you can get into a debt cycle.

What is the Main Disadvantage of a Payday Loan?

The key disadvantages of payday loans include high interest rates (400% per annum or more), short repayment terms, and late payment fees. If you don’t have enough funds in your account to repay the loan, insufficient funds fees may also apply.

Are there any Additional Charges, such as a Cash Advance Fee, Associated with Using My Debit or Credit Card to Make Payments?

There is no cash advance fee when you use your debit or credit card to purchase goods or services.

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