although cash advance are quick and simple, there are often strings attached.
a cash advance is a good option if you have urgent money needs. it’s fast, easy, and your credit card issuer may be asking you to borrow money by sending you blank checks and offers. cash advances have many limitations and costs so make sure to explore other financing options, such as the ones listed below. let’s first look at the terms of a cash advance credit card. this will allow you to compare it with other options.
key takeaways
- a credit card cash advance can be described as a loan that your credit card issuer gives you.
- advances are generally not subject to an interest-free grace period and have a higher rate of interest than regular purchases. they also carry a transaction charge.
- the advance amount is typically limited to a certain percentage of your credit limit.
- there are many options: you can borrow money from family and friends, your 401(k), collateral, personal loans from banks or a salary advance.
how does a credit card cash advance work?
a credit card cash advance can be described as a loan that your credit card issuer gives you in the form of cash. the cash advance will be listed on your monthly statement as a transaction. interest will continue accruing until the loan is paid off.
cash advances have terms that are significantly different to everyday purchases. this is a significant difference. cash advances are not subject to a grace period. interest starts accruing as soon as the transaction day. cash advances are usually more expensive than everyday purchases.
credit card cash advance terms
the schumer for your credit card contains details about cash advance fees, terms and conditions. this should be on your credit card statement or in the original credit agreement. here is an example of the chase sapphire preferred card. this shows that the annual percent rate (apr), for cash advances is 24.99%. it’s 15.99% for purchases, depending on credit. the fee is either $10 or 5% of your advance, depending on which is higher.
important: payments are made according to the method disclosed by credit card issuers to credit cards with different balances. not necessarily the balance that the cardholder is trying to pay. chase applies the minimum payment to account holders with military star rewards. chase will apply any payment beyond the minimum “in whatever way we choose”.
this means that even if your payments are made on a regular basis and with diligence, it may be difficult to pay the advance. it is easy to get sucked into a spiral of debt.
sometimes, cash advances are limited to a certain percentage of the cardholder’s credit limit. each credit card issuer has its own policy and formula to determine cash advance limits. the cash limit in this example is 20% of your credit limit.
8 alternatives to credit card advance
it’s worth looking into other sources of income because of the higher cost associated with a cash advance. these eight options could be more or less effective than a cash advance depending on your credit worthiness. each option has its advantages and disadvantages.
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friends and family – loan
ask your friends and family for a short-term, free loan. although asking for a loan can be awkward, it could also come with many emotional strings. you can help keep things professional by using a written agreement that clearly outlines all terms. this will ensure that both parties know what to expect regarding repayment and cost.
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401(k), loan
many 401(k), administrators permit participants to borrow funds themselves. although interest rates and fees are subject to change depending on the plan administrator and employer, they are generally comparable with personal loan rates. the maximum loan amount is 50%, with a maximum of $50,000. however, fees and interest rates vary by employer and plan administrator, but they are generally competitive with personal loans rates (see below).
covid-19 pandemic exclusion to 401(k), loans and early withdrawals
in 2020, there was an exception to the loan limit. this was made by the coronavirus aid, relief and economic security act, which was passed in march 2020 to address the covid-19 pandemic. the cares act allows borrowers to take 100% of their 401k accounts between march 27th and sept. 22, 2020. this includes up to $100,000.
congress also allowed 401(k), holders to withdraw up to $100,000 without any penalty. this is in addition to the 10% early withdrawal penalty that applies to those under 59.5 years of age. you would have to pay income taxes if you withdraw distributions before 2020. the irs allowed for a three year repayment period. the irs allowed for a three-year repayment period.
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roth ira
although it is not recommended as the roth ira funds are meant to be used for retirement, you can use them as an emergency fund. the roth ira’s contributions are made after tax dollars. internal revenue service rules permit you to withdraw the money at any time, without additional tax and without penalty. you must not withdraw more money than you have contributed if you are under the age of 60 1/2. 5
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bank personal loan
a personal loan can be more affordable than a cash advance on a credit card for borrowers with excellent or good credit. the payoff time will be quicker than the minimum credit card payments and this will reduce the overall interest.
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collateral loan
a collateral loan is any loan secured by real assets. these loans often have less stringent credit requirements than an unsecured loan. your residence’s worth is what secures home equity loans and credit. a trust, certificate or deposit (cd) can also be used to secure loans.
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salary advance
low-cost payroll advances are offered by many employers as an alternative to the more expensive payday loans. although fees can be as low at $8, be aware of the interest rates. these fees can range from 10%-165% which is considered predatory lending territory. you can set up automatic paycheck deductions to make payments.
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peer-to-peer loan
p2p lending is a way for individuals to borrow money from investors and not banks. 7
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title or payday loan
due to its high cost, a car title loan is not recommended. payday loans are similar to title loans and can have high interest rates, ranging from 300% to 500%. many borrowers find it difficult to pay the fees, so they may only consider a a data-component=”link” data-ordinal=”1″ data-source=”inlinelink” href=”https://www.investopedia.com/terms/c/car–title–loan.asp>car title loan. a final cost that exceeds the original amount of the original loan amount. these are the two most popular loans. the credit card cash advance is not superior in these cases, except for states with very strict interest rates.
the bottom line
each short-term loan option comes with its own pros and cons. cash-flow problems can be stressful, but you don’t need to panic. it is important to take the time to explore all options. short-term loans can be very restrictive, both financially and emotionally. you may find that borrowing from your credit card is more suitable depending on your needs and your timeframe. cash advances from credit cards are too expensive to be considered for an emergency.
