A cash advance is a temporary loan you can take on a credit card or through a "payday loan" provider. Cash advances can be expensive as you normally pay a finance fee and escalated interest rates.
Cash Advance Fee Basics
The typical purpose of a credit limit on a revolving card account is to allow the user to borrow up to a certain amount for purchases. With a cash advance transaction, you use the available credit on your card to acquire cash. Card providers treat a cash advance as a temporary loan as opposed to a conventional purchase transaction, according to Citi. Therefore, they charge you a fee for taking out the loan and a higher interest rate. Also, interest begins to accrue as soon as the cash advance posts. There is no grace period as there typically is with purchases.
Finance Fee Types and Amounts
You normally pay a per-transaction fee, either a flat finance fee or a fee that is a percentage of the amount borrowed. For flat fees, it makes sense to take one larger advance rather than several smaller advances, so that you only pay the fee one time. The actual charge varies by provider, but it can go as high as 5 percent of the advanced amount, according to the Nolo legal website. If you take an advance of $1,000 at a rate of 5 percent, for instance, you pay $50 at the time of the transaction. Some banks waive the finance fee or offer lower-percentage fees when you use convenience checks or take advantage of a special promotional offer.
Interest Charges and APR
When comparing credit card products, it's important to understand that creditors charge different interest rates and fees for different purposes. Each creditor is required by the Federal Truth in Lending Act to quote borrowing fees as an annualized percentage rate, according to the Federal Trade Commission. The APR for cash advances includes the upfront finance fee and the interest rate, expressed as an annual percentage rate. The interest rate on cash advances might be higher than your regular credit card APR. It can run as high as 25 percent, reports Nolo, and when combined with an upfront finance fee, the APR is much higher.
Payday Loan Fees
Some lenders offer a specialty loan product known as a cash advance or payday loan. Though slightly different than borrowing from a credit card provider, the premise is much the same. You get cash upfront in exchange for a commitment to pay an upfront finance fee and to repay the debt within a limited period of time. If you can't repay by the deadline, you can extend the due date with another upfront fee. Payday lenders often get a bad rap because of their high APRs and sometimes unscrupulous marketing tactics, but the FTC points out that these lenders are obligated to disclose finance charges upfront like other creditors.