Is It a Smart Financial Move to Take Out a Cash Advance?

what is a cash advance

The great thing about credit cards is that they can offer you protections on purchases that you can’t get when you use cash or a debit card.

And, they can help you leverage your cash flow by allowing you to finance big purchases, instead of paying for them all at once.

But you can’t use a credit card everywhere. Sometimes, you need to use cash.

However, credit card plastic could technically help you in those situations, too. You can take what is a cash advance through your line of credit.

Curious to know what is a cash advance and what happens when you use it? Let’s break it down and see if a cash advance on a credit card is as convenient as it claims.

What is a cash advance on a credit card?

A cash advance on a credit card is a way to withdraw cash using your line of credit.

Credit card companies will even send you cash advance checks that you can use, sometimes called convenience checks. You fill out the check and use it as payment. Just like you would a check from your bank account.

You can use a check and cash it, or you can withdraw cash from an ATM up to a certain limit.

Why take one out? It gives you payment flexibility. Cash advances can help you pay for something you need if cash is the only option for payment.

Depending on your credit card company some purchases that you charge directly on your credit card can count as cash advances too, such as money orders and lottery tickets.

How do cash advances work?

Think of a cash advance like a loan you take through your credit card. You’re just borrowing the cash from your line of credit.

However, just like any other loan, this is money you need to repay. And, the credit card company will assess a fee for allowing you to take out the “loan” in the form of flat fees and interest rates.

Flat fees are based on the amount of the cash advance. It’s usually anywhere from two percent to five percent of the amount borrowed.

The way interest rates work on cash advances is where things can get financially risky. For one, the rate is much higher than the rate you pay when you use your card for normal charges.

Additionally, the interest rate on cash advances can be double what your normal APR is. Some companies charge as much as 29.99% APR to take out cash through your line of credit.

Make sure you understand exactly how that interest is calculated by your credit card company before taking a cash advance on a credit card.

How is interest calculated for cash advances?

Normally, when you charge something to your card today, you usually have a full billing cycle to pay off the charge.

But when it comes to understanding how do cash advances work, it’s important to know the credit card company calculates interest differently. That’s because there’s no grace period.

Whatever balance you create by taking an advance starts accruing interest immediately. Therefore, your costs can rise exponentially for every day you carry the balance.

If you do take a cash advance, you must make a plan to quickly repay the money you borrowed against your own line of credit.

Can you use a cash advance responsibly?

Most people will never have a real use for a cash advance. With all the financial downsides, it’s just not worth the extra cost that you pay when you use this method of payment.

There’s no reason to do it if you can use a credit card. And in cases when you can’t, it almost always makes more sense to wait to make the purchase until you do have cash.

That might mean waiting until you can go by the ATM with your debit card. Or, simply saving up for what you want.

Cash advances shouldn’t be outlawed from your financial toolbox. But using them responsibly might mean using them only in an extreme emergency.

It’s entirely possible that you could find yourself in a situation where you need to make a purchase but the merchant doesn’t accept credit cards — and you don’t have any cash. Using your credit card for a cash advance can help get you out of that sticky situation.

But using a cash advance on a credit card to get cash for discretionary purchases or because you want something (rather than need it) is not a smart money move.

Most people will fare better by exploring other options. Consider taking a personal loan if you need cash for a large purchase or investment. Or, save up the cash you need over a period of time. It may not be an instant fix, but it’s the most financially savvy solution to take if you can.

Interested in a personal loan?

Here are the top personal loan lenders of 2018!
LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
  2. Personal Loans: Fixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 5.29% APR to 11.44% APR (with AutoPay). SoFi rate ranges are current as of December 1, 2017 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.29% APR assumes current 1-month LIBOR rate of 1.34% plus 4.20% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of August 1, 2017, the one-month LIBOR rate is 1.23%. Variable interest rates range from 6.02% – 15.97% (6.02% – 15.97% APR) and will fluctuate over the term of your loan with changes in the LIBOR rate, and will vary based on applicable terms and presence of a co-applicant. Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with Citizens Bank at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, Citizens Bank checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Benefit: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.39% - 29.99%$1,000 - $50,000Visit Upstart
5.29% - 14.24%1$5,000 - $100,000Visit SoFi
8.00% - 25.00%$5,000 - $35,000Visit Payoff
5.99% - 16.24%2$5,000 - $50,000Visit Citizens
5.99% - 35.89%$1,000 - $40,000Visit LendingClub
5.25% - 14.24%$2,000 - $50,000Visit Earnest
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