A credit card company, bank, or other financial institution will offer a short-term loan under the economic phrase “cash advance.” It is a specific kind of loan created to assist consumers in fast accessing cash during times of need when they do not have enough money in their bank account to fulfill their expenses. Before deciding to take out a cash advance, it is important to consider the risks and costs involved. For example, cash advances typically have higher interest rates and fees than other forms of credit.
How Does a Cash Advance Work?
When you decide to take a cash advance, you need to contact the bank or use an ATM that accepts your card. More often than not, card issuers only allow you to withdraw a portion of your regular credit limit. That is, there is a restriction on cash withdrawals. The portion of the credit limit you can cash out will vary depending on your credit card issuer.
When you take a cash advance, be prepared to pay a fee. It is usually a percentage of the amount you borrow. That is, the more your cash advance, the greater the commission. Most often, such a fee ranges from 2% to 5%. In addition, these advances carry interest rates that can be 20-30% or more higher than standard credit card purchases.
It’s also crucial to keep in mind that interest on cash advances begins to accumulate right away, as opposed to standard credit card transactions, which give you a grace period of 21 to 25 days to pay the balance in full. This indicates that you will incur a sizable sum in interest charges if you do not pay off the cash advance balance in full by your next billing period.
When Should You Consider a Cash Advance?
Cash advances should be considered as a last resort option when all other alternatives have been exhausted. They are typically used in emergency situations where you need cash quickly and do not have the time to apply for a traditional loan. Some common situations where people might consider taking out a cash advance include:
- Medical emergencies: If you or a family member needs urgent medical attention and you do not have enough money in your bank account to cover the expenses, a cash advance can help you get the necessary funds quickly.
- Car repairs: If your car breaks down and you need it to get to work or other important appointments, a cash advance can help you cover the cost of repairs until you can get back on your feet.
- Unexpected bills: If you receive an unexpected bill, such as a large electricity or water bill, and do not have enough money in your bank account to cover it, a cash advance can help you avoid late fees and penalties.
- Travel emergencies: If you are traveling and lose your wallet or have your credit card stolen, a cash advance can help you get the funds you need to get back home or cover your expenses until you can get a new credit card.