When you are short on cash and need to borrow money, you have a few options. One is to get payday loan from a storefront or online company. Payday loans are sometimes called cash advances. However, there is a different type of cash advance as well, which you get from a credit card. Payday loans and credit card cash advances have significant differences.
Credit Score Required
A payday loan typically does not require any type of credit check to authorize the loan. You only need to have a checking account so you can write a post-dated check to secure the loan. On the other hand, if you want to get a credit card cash advance, you need to have a credit card first. You can either use a card you already have or apply for a new one. All credit card companies check your credit score when you apply and only issue credit cards to people who meet their credit standards, which vary from one company to another.
The fee to get a payday loan is usually about $15 per every $100 you borrow for two weeks. If you roll over the loan, you have to pay the fee all over again. Therefore, if you keep rolling over the payday loan for a year, you will pay the equivalent of more than 300 percent interest. A credit card cash advance usually charges a fee of 1 to 4 percent of the amount advanced. Sometimes there might be a flat minimum fee. If the cash advance is through an ATM, there is likely an ATM fee of a few dollars. In addition, the borrower pays interest on the balance each month, usually at a rate a few percent higher than regular credit card purchases. According to Smart Money, most credit card cash advances charge 20 to 25 percent interest annually.
When you take out a payday loan, you must repay it in full very soon, usually within two weeks. If you cannot repay it, you must pay the charges again to roll over the loan for another two weeks. Some states have laws that require payday lenders to work out an installment schedule to stretch out the repayment. With a credit card cash advance, on the other hand, you only have to pay the minimum credit card payment, which factors in the amount of the cash advance and any other draw on the line of credit. You can pay more than the minimum if you would like to pay it back sooner, but in general it is much easier to meet the repayment schedule for a credit card cash advance than a payday loan.
Which is Better?
The better type of borrowing depends on your situation. If you already have a credit card with available credit, a credit card cash advance offers a lower long-term interest rate and low monthly payments. If you do not have a credit card and do not think you will be able to get one fast enough, a payday loan offers a quick solution and moderate fees if you pay it back right away. However, if you do not expect to be able to pay back a payday loan in two weeks, carrying it over can be far more expensive than paying interest on a credit card cash advance.