Payday loans and cash advance apps are common short-term borrowing options that can provide quick financial relief – but often at a high cost.
In most cases, a more traditional borrowing option like a personal loan will offer you a better deal. But if you’re forced to choose between the two, a cash advance app will generally be the better option. Indeed, some states have banned payday loans or have strict limitations, given their potentially predatory nature.
This comprehensive guide will explore the distinctions between the two loans and give you an idea of how each can impact your financial health so you can make informed decisions.
Need money fast? A cash advance or personal loan may help, but they work very differently. While both allow you to borrow money, the costs, fees, credit check requirements, and repayment terms vary significantly.
In this article we’ll explain everything you need to know about cash advances vs. personal loans. We’ll cover
- What are cash advances and personal loans?
- Key differences between cash advances and personal loans
- Pros and cons of each option
- Who should consider a cash advance or personal loan
- Alternatives to high-interest loans
What Are Cash Advances and Personal Loans?
A cash advance is a short-term loan offered by your credit card company. You can withdraw a cash advance at an ATM, bank, or by check. The money borrowed is added to your credit card balance.
A personal loan is an installment loan from a bank, credit union, or online lender. Personal loans provide a lump sum of cash upfront, which you repay in fixed monthly installments over a set repayment term.
Personal loans are typically 1 to 5 years in length. Cash advances are intended as very short-term financing, with repayment expected within weeks or a couple months.
Now let’s look at some key differences between these two ways to borrow money
Comparing Key Differences
Cash advances and personal loans vary in several important ways:
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Interest rates: Cash advances typically have much higher interest rates, often over 20% and sometimes exceeding 30%. Personal loans can have rates from 5% to 36%, with rates below 10% available for borrowers with good credit.
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Fees: Cash advances charge an upfront fee, usually 3-5% of the amount borrowed. You may also pay ATM fees if you get the cash that way. Most personal loans don’t have origination or prepayment fees.
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Credit check: For personal loans, lenders run a hard credit inquiry that can temporarily lower your credit scores. Cash advances don’t require a credit check.
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Payback term: Cash advances are due quickly, often within weeks or a couple months. With personal loans you generally have between 1 and 5 years to repay. This longer term equals smaller monthly payments.
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Amounts: Personal loans are available from $1,000 up to $100,000 from some lenders. Cash advance limits depend on your credit card but are typically under $5,000.
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Collateral: Personal loans are normally unsecured loans, meaning no collateral is required. Cash advances are essentially secured by your credit card account.
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Credit card rewards: Cash advances don’t earn rewards like purchases with credit cards. With personal loans, you miss out on rewards but also avoid credit card interest.
Pros and Cons of Each
| Cash Advance Pros | Cash Advance Cons |
|---|---|
| Fast access to cash | Very high interest rates |
| Easy approval | Expensive fees |
| No credit check | Must pay back quickly |
| Can access at ATMs 24/7 | Use reduces available credit |
| Personal Loan Pros | Personal Loan Cons |
|---|---|
| Lower interest rates | Application process takes longer |
| Fixed monthly payments | Hard credit check |
| Longer payback terms | May need collateral if poor credit |
| Unsecured for good credit | Large loans can have prepayment penalties |
| Known loan costs upfront | Not quite as fast access to money |
As you can see, personal loans offer more benefits for the majority of borrowers needing a larger loan amount and longer to repay. Cash advances cater more to urgent small-dollar borrowing needs.
Who Should Consider Each Option?
Here are some examples of when each type of financing may make the most sense:
Cash advance if:
- You need $1,000 or less immediately and can pay it back within 1-3 months
- You have poor credit so can’t qualify for better personal loan rates
- You have an emergency and no other options to cover urgent costs
- The high interest and fees aren’t a concern since you’ll pay the cash advance off quickly
Personal loan if:
- You need more than $1,000 to cover major expenses like medical bills or home repairs
- You want the lowest rates possible and have good credit (670+ FICO score)
- You require 2 years or more to comfortably repay the borrowed amount
- You want fixed payments instead of revolving credit card balances
- You will use loan funds for long-term investments like debt consolidation or continuing education
As a rule of thumb, the longer you need to repay a loan and the higher your credit score, the more advantageous a personal loan will be over a credit card cash advance.
Alternatives to High-Interest Loans
If you want to avoid the downsides of both cash advances and personal loans, here are a few options to consider first:
- 0% APR credit cards: Good for borrowing over 12-18 month periods interest-free
- 401(k) or retirement plan loans: May provide the lowest rates; easy approval
- Lending circles: These nonprofit peer-to-peer loans charge little or no interest
- Local community assistance programs: May offer emergency grants and low-cost loans
- Borrowing from family/friends: Discuss terms and offer interest; get agreement in writing
The bottom line is if you need money fast for an emergency or unexpected expenses, weigh the pros and cons of a cash advance and personal loan carefully based on your individual situation. Your credit, the loan amount required, and your repayment term will help determine which option is best for you.
Key Takeaways: Cash Advance vs. Personal Loan
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Cash advances provide immediate cash directly through a credit card account. Personal loans are installment loans from lenders paid back over 1 to 5 years.
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Cash advances don’t require a credit check but have fees of ~3-5% and high interest rates. Personal loans do a hard credit check but offer lower rates for borrowers with good credit.
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Cash advances allow a few months maximum to repay the borrowed amount. Personal loans have fixed monthly payments and longer repayment terms.
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If you need cash immediately short-term and have lower credit, a cash advance may be necessary. For large loan amounts and longer payback periods, a personal loan is likely the better choice.
How to Apply for a Cash Advance
Compared to payday loans, applying for a cash advance through an app can be a more streamlined and accessible process. However, you should still exercise caution and ensure you are fully aware of the terms and costs associated with the advance to avoid future financial complications.
To access a cash advance, follow these steps:
- Research and choose an app: Start by researching available cash advance apps on your device’s app store. Check reviews, interest rates, fees and terms to select a suitable option. MarketWatch Guides has this list of the best cash advance apps.
- Download and register: Once you’ve selected an app, download it and sign up using your personal information. This usually includes details like your name, address, contact information and possibly some form of identification.
- Connect your bank account: Most apps will require you to link your bank account, allowing the app to monitor your transactions and assess your ability to repay the advance.
- Request the advance: Some apps let you choose how much you want to advance (up to a specific limit), while others might offer a fixed amount based on your income.
- Review terms and accept: Before accepting the advance, ensure you fully understand the repayment terms, fees and any interest or additional costs associated.
Pros and Cons of a Payday Loan
Payday loans present significant risks. While they may look appealing, they can quickly get you in financial trouble.
How a Credit Card Cash Advance Works (and why you shouldn’t do one)
FAQ
What’s the difference between a personal loan and a cash advance?
Which is better, a loan on card or a cash advance?
What is the difference between a cash loan and a personal loan?
Does a cash advance hurt your credit score?
What is the difference between a personal loan and a cash advance?
A cash advance loan is a loan that is designed to provide funds for a short time, typically for emergencies. It usually comes with a higher interest rate and a fee. Personal loans generally have longer terms and lower interest rates than cash advance loans. How Can I Get Approved for a Personal Loan?
What is a fast alternative to a cash advance?
A similarly fast alternative to a cash advance is a personal loan from an online lender, some of which offer same-day or next-day funding. A local credit union may also be able to provide a fast personal loan, but you’ll typically have to join the credit union as a member first. You’re able to pay off the loan quickly.
What is the difference between a cash advance and a payday loan?
Cash advance: A cash advance is a short-term loan. This option is available through your credit card issuer and cash advance apps. Payday loan: A payday loan is a short-term loan. Usually, you must repay the funds within a few weeks. In general, this type of loan comes with high interest rates and offers relatively small loan amounts.
Should you take out a cash advance instead of a personal loan?
However, there are times when you might have to take out a cash advance instead of a personal loan. A personal loan is a good solution if your credit and income are solid enough to qualify and you don’t need the money for a few days. Personal loans have minimum loan amounts, usually $1,000, and minimum loan terms (usually, one year).