What you need to know about taking out a cash advance | Savings and budgeting

Sometimes we hear advice so often – don’t do this, don’t do that – that we just know something is a bad idea and forget about it. Why It’s a bad idea.

Making a cash advance is a bad idea. If you ever find yourself in the situation where you feel pressured into taking a cash advance, you would do well to learn what they are and what it entails.

Understand what a cash advance is. Usually, when someone refers to a cash advance, it’s about using their credit card to get the money. Instead of, say, paying for groceries or a book with your credit card and paying off your credit card later, you borrow money from your credit card and pay it back later.

But, in reality, cash advances are also payday loans – you get a cash advance that you have to pay back. It is also the same as getting a prepayment anticipation loan, when a tax preparer gives you money that you expect to collect from the Internal Revenue Service. You could argue that if you overdraft your bank account, you get a cash advance. Your bank has paid something for you and you will have to pay it back.

Either way, all cash advances involve money being advanced to you which you will have to repay, probably quite quickly – usually with fees or interest and sometimes both.

Know that they are expensive. This is the main disadvantage of cash advances. You borrow money and pay a large amount of money to do so.

There are three main reasons why cash advances are considered very expensive loans:

High fees. Often times, when you take a cash advance with your credit card, you pay either 5% of the money you borrow or $ 10. And you will pay the most. So generally if you borrow up to $ 100 you will still pay $ 10.

High interest rates. You will get this with credit cards and certainly with payday loans. Currently, the average annual rate for credit card cash advances is 22.11%, according to LowCards.com. And with a few exceptions, it’s more expensive to borrow real money on a credit card than it is to use your credit card to pay for goods and services. So if your APR is 22% when you use your credit card at the grocery store, a cash advance will likely have a significantly higher APR.

The average APR for a payday loan is almost 400%, according to the Consumer Financial Protection Bureau. This, of course, makes a credit card cash advance seem like a good deal, but they’re both really bad deals.

If you borrow $ 100 with a typical credit card, you’ll pay off $ 22.11, plus $ 10, so you’re paying almost a third of $ 100 to borrow $ 100. If you borrow $ 100 from a payday loan store, you will typically be charged $ 15. This does not mean that a payday loan store is better because of the …

Short grace periods. Getting charged $ 15 for a $ 100 payday loan doesn’t seem bad, but you’ll have less time (two weeks) to pay off the money than with a credit card (one month), and the real problems arise if you decide you should borrow more than $ 100 from a payday lender. For example, if you borrow $ 400, you probably pay your lender $ 460 back – in two weeks. And if your next paycheck is, say, $ 1,000, half of that paycheck will go to the lender, and you’ll have to try to make it through until the next paycheck.

And while you should have 30 days to pay off your credit card cash advance before it’s considered late, interest starts accruing immediately.

These are just very expensive loans, according to Alexander Stern, a consumer lawyer with his own firm, Stern Legal Services, in Berkeley, Calif.

“A $ 1,000 loan can be up to three times that amount with enough time and interest,” he says.

Look at the fine print. There is most likely something written in legal jargon that you won’t like. You just have to find it.

“It is extremely important to comb through the terms and conditions of any short-term loan,” Stern said. “Ads highlight the best parts of a product and rarely discuss the worst aspects. Salespeople are also focused on the sale rather than what is necessarily best for a given consumer. This is why it is important that you are proactive in carefully reading any contract before signing. “

And because you’ll never be able to carefully read a contract with a salesperson waiting at their desk or looking over your shoulder, you might want to consider taking the documents home and coming back the next day – or at least in an hour. or two, giving yourself time to read it all and think about what you’re doing.

Be aware of the financial pitfalls. The reality is, if your finances are fragile enough, you might feel like you have no choice but to take a cash advance. Just try not to get carried away by the idea that the financial institution lending you money wants to help you. He wants to earn money.

Chrystine Julian, artist and poet in Redlands, Calif., Doesn’t mince words. Due to a heart attack, surgery, and other health issues, she recently needed a payday loan.

“My financial life is in the bathroom,” she says.

She only borrowed $ 150 from an online payday lender and was able to pay it back for less than $ 20 more than her original loan amount. In doing so, she avoided going overdraft on her bank account and being charged a $ 35 fee. The cash advance, she says, worked well for her.

But Julian says she had to borrow an additional $ 150 soon after and logged on to the website and found out she was ready for a $ 2,500 loan. If she had taken the $ 2,500, she would have had several years to pay it off, at a cost of over $ 12,000. Instead, she called the website and asked them to change the setting so that she could only borrow $ 150.

But she marvels at the mess she might be in now, if she hadn’t been strong. “I could have done it with one click,” Julian says of a $ 2,500 loan.

“Never forget that these are predatory lenders.”

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