When you need cash quickly, your first thought might be to consider a credit card cash advance. It’s quick, it’s easy, and often your credit card issuer seems to be begging you to borrow by sending you offers and blank checks. Still, cash advances come with many costs and limitations, so before you embark on this route, be sure to investigate alternative financing, such as the methods listed below. However, let’s take a look at the terms of a credit card cash advance first, so you can better compare it to other options.
Key points to remember
- A credit card cash advance is a loan from your credit card issuer.
- Advances generally do not have an interest-free grace period, have a higher interest rate than regular purchases, and incur transaction fees.
- The amount of the advance is usually limited to a percentage of your credit limit.
- Alternatives include various types of loans – from family or friends or your 401 (k), or a secured or personal loan from a bank, for example – or a payday advance.
How a credit card cash advance works
A credit card cash advance is a cash loan from your credit card issuer. As with any purchase, the cash advance will appear as a transaction on your monthly card statement, and interest will accrue until it is repaid.
Significantly, however, the terms of cash advances are different from everyday purchases and are not in your favor. There is generally no grace period for cash advances; interest begins to accrue from the day of the transaction. In addition, the interest rate is generally a little higher for cash advances than for everyday purchases.
Conditions for cash advances by credit card
Details on cash advance fees and terms can be found on the credit card’s Schumer box, which should appear on your card statement or in the original credit card agreement. Here is an example of the Chase Sapphire Preferred card. It shows that the annual percentage rate of charge (APR) for a cash advance is 24.99%, compared to 15.99% for purchases (depending on credit). The fee is $ 10 or 5% of the advance, whichever is greater.
Another important detail: When a credit card has different balances, payments are applied as specified by the credit card issuer, not necessarily to the balance the cardholder wants to pay first. For Military Star Rewards account holders, Chase applies the minimum payment to the balance with the highest APR. Any payment above the minimum is applied “however we choose”.
These terms mean that even if you make payments regularly and diligently, it can be difficult to repay the advance, especially if you continue to use the card to make purchases. It is very easy to get caught up in an ever increasing spiral of debt.
Sometimes cash advances are limited to a percentage of the cardholder’s credit limit. Every credit card issuer has their policy and formula for setting cash advance limits. In this example, the cash limit is 20% of the credit limit:
Your credit card company decides what portion of your balance to apply any payment that exceeds the monthly minimum amount, allowing it to reduce low-interest balances before high-interest ones.
8 alternatives to a credit card advance
Due to the higher cost of a cash advance, it is worth looking for other sources of income. Depending on your creditworthiness and your assets, these eight options may be better or worse than a cash advance. Each has its advantages and disadvantages.
1. Loan from friends or family
Consider asking loved ones for a free or low-interest short-term loan. Yes, asking can be embarrassing, and the loan can come with a lot of emotional tricks. It will help if you keep things in order: use a properly executed written agreement that spells out all the terms, so both parties know exactly what to expect regarding costs and reimbursement.
2. 401 (k) loan
Most 401 (k) administrators allow participants to borrow funds from themselves. Interest rates and fees vary by employer and plan administrator, but are generally competitive with prevailing personal loan rates (see below). The loan limit is 50% of the funds up to a maximum of $ 50,000, and the repayment is five years or less. There is no credit check and payments can be set up as automatic deductions from the borrower’s paychecks. Keep in mind that while you borrow funds from your 401 (k), they don’t generate any return on your investment, which could affect your retirement.
COVID-19 pandemic exception to 401 (k) loans and early withdrawals
An exception was made to this loan limit in 2020 under the CARES (Coronavirus Aid, Relief, and Economic Security) law adopted in March 2020 in response to the COVID-19 pandemic. Under the CARES, 401 (k) law between March 27 and September 22, 2020, borrowers could withdraw 100% from their 401 (k) account, up to $ 100,000.
In addition, Congress has authorized holders of 401 (k) to receive up to $ 100,000 in distributions without being affected by the 10% early withdrawal penalty for those under 59.5. If you received any distributions in early 2020, you had to pay tax on the withdrawal. But the IRS allowed a three-year repayment period. This means that you can pay these taxes over time, or you can repay the distribution as a rolling contribution.
3. Roth IRA
While this is not highly recommended as the funds are meant to be for retirement, there is a way to use your Roth IRA as an emergency fund.. Since contributions to a Roth IRA are made with after-tax dollars, Internal Revenue Service (IRS) rules allow you to withdraw that money at any time without penalty and without paying additional tax. However, if you are under 59 and a half, make sure you don’t withdraw more than what you contributed, even if the account has grown. Income from your contributions is subject to taxes and penalties.
4. Bank personal loan
For a borrower with good or excellent credit, a personal loan from a bank can be cheaper than a cash advance with a credit card. In addition, the payment will be faster than the minimum credit card payments, which will further reduce the amount of overall interest paid.
In a financial emergency, you may need to borrow money quickly. Finding the best loan can seem especially daunting in an emergency. However, even if you are facing the additional hurdle of bad credit, you can still have access to emergency loan options.
5. Guarantee loan
Any loan secured by real assets is a secured loan, which often has less stringent credit requirements than an unsecured loan. Home equity loans and lines of credit are secured by the value of your home, for example. Some banks also grant loans against the value of a trust or certificate of deposit (CD).
6. Payday advance
Many employers offer low cost payday advances as an alternative to more expensive traditional payday loans. The fees can be as low as $ 8, but beware of interest rates. They range from 10% to 165%, which is predatory lender territory. Payments can be set up as automatic payroll deductions.
7. Peer-to-peer loan
P2P lending, as it is now called, is a system in which individuals borrow money from investors, not banks. Credit requirements are less stringent and approval rates are higher.The most expensive loans cap at around 30% APR, plus a 5% loan fee.
8. On payday or loan of title
An auto title loan should be considered a last resort because of its astronomical cost. Like title loans, payday loans typically charge triple-digit interest rates, from 300 to 500 percent and more.The fees on both types of loans can be so unaffordable for cash-strapped borrowers that many renew their loans multiple times, at an end cost of several times the original loan amount. These two are probably the only loans that have a greater credit card advance, except in states where interest rates on this type of financing are very tightly capped.
The bottom line
Each short term loan option has its pros and cons. A cash flow crisis is a very stressful situation, but that doesn’t mean you need to panic. Take the time to consider all of your options. The terms of short-term loans are often strict, both financially and emotionally. However, depending on your specific needs and your schedule, another type of financing may be preferable to borrowing by credit card. Credit card cash advances are expensive enough that they should only be considered in a real emergency.