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Cash advance types explained: Difference between a payday, paycheck, and credit card cash advance
Learn how to calculate exactly what that cash advance will cost you
If you find yourself in a bind and need to turn to a cash advance option — you are not alone. According to the Pew Charitable Trust, you are part of 12 million Americans who rely on cash advances to get you from paycheck to paycheck every year. And, if you’re like most of us you’re probably scratching your head trying to decide which cash advance option is right for you.
That is why we figured maybe it’s time to put the puzzle pieces of the cash advance world together for you by reviewing the differences between the three most common forms of cash advances, what they are, and how much a typical cash advance would cost you.
Cash advance types explained
• Payday loans
Payday loans are small loans (ranging from $100 – $5000) with very short turnarounds on the payback periods. Generally, the terms of these loans will expect full payback within 14 – 30 days — sometimes longer for larger amounts. Payday loan companies are found in traditional brick and mortar stores, online and even a few banks offer them.
Payday loans charge high interest rates (upwards of 400% depending on what is allowed by state) with aggressive debt collection if not paid back on time. Examples of companies that provide payday loans are My Payday Loan and 365 Fast Loans.
• Paycheck cash advances
Paycheck advances are actual advances on your paycheck. Think of them as a mini-loan to yourself on money that you have already earned. You can request a paycheck advance directly from your employer or with paycheck advance apps. They typically range in amounts from $20 – $250. Paycheck advance apps usually charge a subscription fee or ask for a ‘tip’.
To be eligible for a paycheck cash advance you must meet app’s criteria and build up trust before they will advance more than $50. Generally, many of these basic requirements include things like showing regular direct deposits, having accounts connected to, or with, the app, having accounts that have been open for at least 30 days, and being able to pay back the cash advance on time.
By law, they are not allowed to charge interest, assess fees or deploy traditional collections — if they do, then they are subject to a bevy of lending laws. Repayment of the advance is taken directly out of your next paycheck. Varo and Chime are both examples of banking product apps that offer paycheck advance options.
• Credit card cash advances
Credit card cash advances are loans you can take out against the available balance of your credit card. Credit card companies typically charge a flat fee or percentage of the advance amount, whichever is greater, and a high APR on cash advances.
Interest on cash advance amounts begins to accrue immediately and you have more flexibility to pay it back over a longer period of time by only making your minimum, monthly credit card payment. Companies such as Chase or Citibank would be examples of credit card companies that offer cash advances on their cards.
How do paycheck, payday, and cash advance apps compare
|Where to find||Online or storefront||Employer or online app||Banks|
|How much can you get?||$100 – $5000||$5 – $250||Depends on your card|
|Interest and fees||Average fee of $15 per $100 that you borrow (almost 400% APR)||$0 to a small monthly fee ranging from $5-$20||Typically there is a fee of $5-$10 or 2-8% of the total advance amount whichever is more plus interest starting from 24% and higher|
|Time to repay||Depending on your loan terms, most must be paid back within 2 weeks to a month. Larger amounts can be from 3-6 months if rolled over at an additional cost.||Due next paycheck||Monthly payments based on your credit card terms. Can make only minimum balance payments.|
|Collection||Sent immediately to aggressive debt collectors if late repaying||Comes straight out of your paycheck or deposit. Traditional collections are not allowed.||If late repaying will receive emails and phone calls from your credit card company|
|Credit reporting||Yes||No||Yes, if you are applying for a new card|
How much will a cash advance cost you?
To give you a general idea of what a cash advance would cost you we have calculated how much it would cost to borrow $100 with a 14-day repayment schedule from each source using average interest rates and fees for each.
$100 Payday loan
The average payday loan will cost you about $15 for every $100*.
Cost of loan = How much you borrow + transaction fee
Cost of loan = $15
Total pay back amount = $115.00
$100 Paycheck cash advance app
The vast majority of paycheck cash advance apps usually charge a subscription or ask for a ‘tip’. Depending on whether you are requesting same-day cash or have other services bundled with the app, you may pay a one-time small fee or a range from $5 – $20 a month.
Cost of advance = Usually a monthly subscription or per-transaction fee. Additional charges if you want the money same-day.
Cost of advance = $5
Total pay back amount = $105.00
To learn more about cash advance apps read our article, ‘What is a paycheck advance app and how it works’.
$100 Credit card cash advance
To calculate how much a cash advance from your credit card will cost, you will need to look up the terms and conditions of your card. With a credit card, you have more flexibility about how long you take to pay back the advance. Sticking to a quick pay-off time is always best, however, as interest starts accruing on day one.
We used a 24% per annum APR, 14 day payback time with a flat fee of $10
Cost of advance = (How much you borrow x ((APR/100)/365) x # of days to pay back) + flat fee
Cost of advance = ($100 x (24/100)/365) x 14 + $10
Cost of advance = ($100 x .24)/365 = $.065 x 14 = $0.92= + $10 = $10.92
Total pay back amount = $110.92
Why use a cash advance
There are several reasons why people turn to cash advances to cover expenses between paychecks.
- There is generally no traditional credit score check — For those of us struggling to make it from paycheck to paycheck, our credit may not be so hot. However, most of the apps require you to link your bank account and verify you have regular monthly deposits and a positive cash balance.
- Quick turnaround times on approvals — Cash shortage emergencies are just that, emergencies. You need cash fast and don’t have time to apply or wait to be approved for a larger personal loan.
- Paycheck cash advances are borrowing from yourself so you aren’t going further into debt — the double-edged sword to this is that there will be less money in your next paycheck.
- Paycheck advance may be an add-on feature at your bank or through your employer and thus cost less than a payday loan and/or be bundled with another service for you to use.
- Credit card cash advances are very easy to take advantage of. If you already have a credit card and have an available balance all you need is an ATM and your PIN and you most likely have access to some cash.
Alternatives to cash advances
Cash advances can be a great, short-term fix when you’re in a money pinch. But they can lead us down the wrong path financially speaking if we come to rely on them too much. If you feel a pattern developing you may want to think about some more long-term solutions to permanently solve your cash crunch.
Learning good money habits will have a positive, long-term impact on your life. Start with small things like reviewing your budget to see if there’s any fat you can trim, like that Starz channel subscription you haven’t used in three months. Try not to carry cash around with you because it tends to spend faster on little things that, “wait, what did I buy with that $20 I thought I had, anyway?”
Here are some other ideas to help keep that bank account in the green zone:
We have all experienced a time or two when we open our wallets to the tune of crickets chirping. If this happens to you there may be some cash advance options that work for you in a pinch. Just be sure you know how much it is costing you and avoid becoming dependent on cash advances.
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