3 Different Types of Cash Advance and How They Work

3 Different Types of Cash Advance and How They Work

Cash advances are short-term loans that are repaid with the borrower’s next paycheck. They are often used to bridge the gap between paychecks or pay an unexpected expense that might otherwise require borrowing more expensive credit, such as a personal loan.

There was a time when you might have been skeptical of using a cash advance to help out with your financial troubles. But since the economy has gone sour, more and more people need such services for their finances. Like other loans, these types of advances work based on the principle of repayment.    

What is a Cash Advance?

A cash advance is small and short-term financing that’s fast and easy to approve. It’s convenient in the short term because you can almost immediately get the money. Application is easy since it often doesn’t require credit checks.

How do they work, exactly? No umbrella term can explain how all cash advances work because several cash advances are suited to different situations. They’re an excellent alternative to an installment loan offered by creditninja.com.

For example, if you’re in a store that needs cash and doesn’t take card payments, you can go for a credit card cash advance to pay up. Or, if you’re a business owner who needs fast and easy financing, you can go for a merchant cash advance. They are popular in the market because, as mentioned earlier, they are fast, easy, and often require no credit check and collateral.

However, their interest rates are high since they’re a type of unsecured loan. Also, they typically don’t have any grace period. It means the interest will start accumulating immediately after you get the money. Make sure to consider these things before you get a cash advance.

Credit Card Cash Advance

A credit card cash advance is a short-term loan that you can take from your credit line. It allows you to borrow against your credit as a short-term loan from an ATM or the credit card issuer. Of course, this will be included in your monthly statement and should be paid back in full. You can think of it as using your credit to get cash.

Credit card cash advances are convenient if you’re in a pinch and need some cash. If your card has a PIN, you can directly get cash advances from your nearby ATM. Otherwise, you’ll have to go to the nearest bank that offers cash advances through your card’s payment network. The only thing you’ll need to bring with you is a valid ID.

However, you have to note that you can’t borrow your entire credit line as a cash advance. For most credit card issuers, there’s a limit on how much credit you can take out as a cash advance, and mostly, it often has a cap of a hundred dollars. If you need to purchase something with cash that exceeds the limit, you can’t take out a cash advance.

Merchant Cash Advance

A merchant cash advance allows a business owner to obtain some money regularly through its business merchant account. The advance will then be paid through the business’ revenue or credit card sales.

However, merchant cash advances have different factors and criteria. Also, they typically have a higher interest rate than your average business loan.

Any business owner considering getting a merchant cash advance should thoroughly read the terms and conditions before agreeing to get a merchant cash advance. Once an agreement is made, the money will be transferred to the business’ bank account for usage.

Each day, an agreed percentage of sales will be paid back to the cash advance. It’s called a “holdback” and will continue until the merchant cash advance is paid in full.

Payday Loans

Yes, they’re called loans, but they work similarly to cash advances, specifically, an advance against your salary. It’s a form of short-term borrowing where a lender will offer you cash based on your income. The loan’s principal will be based on a percentage from your next salary and will be paid back when you get your pay along with interest in one lump sum.

However, note that it often has a high-interest rate and has a lot of fees involved. It also has a fixed rate, and instead of calling it interest rates, they call it a flat fee, which often goes from $10-$30 per $100 you borrow.

Final Words

Each of these types of cash advance is tailored to a specific situation, so you might want to consider your situation before getting one. Also, cash advances tend to be expensive, so you have to make sure you can pay them back before getting one, or they might turn into a debt trap. But aside from that, cash advances are great and convenient when you’re in a pinch and need quick funds.

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