By the Pachyy Editorial TeamThe Pachyy Editorial Team comprises a diverse and experienced team of writers, researchers and subject matter experts whose aim is to provide you with useful insights, guidance and commentary on all matters related to your personal finances.
When it comes to borrowing money from your next paycheck, you have two main options – a payday loan or a cash advance. Both of these options serve the same purpose, but it’s important to know the differences between them. A payday loan falls under the category of cash advances, which also include credit card advances, employer advances, and other types of payday advances. While fast cash options may seem appealing, it’s crucial to be aware of the unexpected terms that often come with them. These terms can leave borrowers in even more debt. But don’t worry, we’re here to help you navigate your options and find the best financial solution to get you through until your next payday!
A Quick Comparison of Cash Advances and Payday Loans
Feature
Payday Loans
Cash Advances
Typical Loan Amount
$50 – $1,000
Up to a percentage of your credit limit
Application Requirements
Proof of income, bank account, ID
Credit card in good standing, ID
Accessibility
In-person, online
ATM, bank withdrawal, checks
Repayment Frequency
Lump sum on next payday
Minimum monthly payments or full amount
Interest-Free Period
None
Typically none, but varies by credit card
Annual Percentage Rate (APR)
Often 300% – 400% or more
Typically 25% – 30% for credit card advances
Financial Counseling Services
Rarely offered by lenders
Some credit card companies offer financial guidance
Rollover Options
Allowed in some states, with fees
Not applicable, but can lead to debt cycle if not managed
Impact on Credit Line
No direct impact unless defaulted
Reduces available credit and may increase utilization ratio
Regulation
State-regulated, varies widely
Federally regulated under the Credit CARD Act of 2009
Late Payment Penalties
High fees, possible bank overdraft fees
Additional interest, late fees, credit score impact
Disclaimer: The information provided in the comparison chart above is intended to offer general informational support. It is not meant to be financial advice. Please be aware that the details presented are based on typical scenarios and may not reflect the specific terms, conditions, fees, or APRs you might be offered by a lender or credit card issuer. The terms and regulations of payday loans and cash advances can vary based on the lender, your financial situation, and the laws in your state or country of residence.
Understanding Payday Loans
A payday loan is a type of financial assistance that comes with high-interest rates and short payback terms. According to the U.S. Consumer Financial Protection Bureau, approximately 4.4% of Americans have taken out a payday loan within the past six months.1 Unlike traditional personal loans, payday loans usually require repayment within a brief period of about two weeks or less. This is one of the main differences between personal loans and payday loans. If borrowers are unable to repay the entire loan within this short timeframe, they may incur high interest rates, which can make it even more challenging to pay off the loan. It’s important to note that many payday lenders are often criticized for targeting low-income individuals with their high-interest loans. Consider the cost associated with payday loans before deciding to use them for debt repayment purposes, as there may be better alternatives available.
What Is a Cash Advance?
A cash advance is when you borrow money and later repay it with interest. The interest rate for a cash advance depends on your credit score, financial history, and where you get the cash advance from. For example, payday advances from credit card companies may have higher interest rates compared to advances from your employer.
Types of Cash Advances
There are different ways to access payday advances, such as through credit cards, cash advance apps, or your employer. However, it’s more common for people to use credit cards or apps for payday advances, while employer advances should be reserved for emergencies only.
Credit Card Cash Advance
If you have a personal line of credit, you can take out credit card cash advances typically up to $1,000 within 24 hours. Just keep in mind that credit card cash advances usually come with higher interest rates compared to regular credit card purchases.
Cash Advance App
Cash advance apps, similar to payday loans, are designed to provide quick access to cash when you’re in between paychecks. Here are some popular cash advance apps:
Bright – offers advances from $50 to $250 deposited in one business day.
Chime – offers advances from $20 to $200 deposited instantly.
Dave – offers advances up to $500 deposited in one to three business days. You can pay a fee for a one-hour deposit as well.
Earnin – offers advances from $100 to $500 deposited in three business days. You can pay a cash advance fee for a quicker deposit too.
Empower – offers advances from $10 to $250 deposited in one business day.
MoneyLion – offers advances from $25 to $250 deposited in one to two business days. You can pay an additional cash advance fee for an instant deposit as well.
Employer Cash Advance
You can also request payday advances from your employer. However, it’s important to only do so in emergency situations where no other financial solution is available. Additionally, it’s up to your employer whether they want to grant a cash advance, regardless of your credit score or financial history.
Deciding Between Credit Card Cash Advances and Payday Loans
When trying to determine the best option for you, it’s important to consider the impact each type of loan will have on your credit score.
Debt-to-Income Ratio and Credit Utilization
Both payday loans and cash advances can affect your debt-to-income ratio, as well as your credit utilization ratio depending on the credit scoring model used by the credit bureaus. Your debt-to-income ratio compares the amount of debt you have to your income. This includes credit card purchases, personal loans, home equity loans, and student loans. Your credit utilization ratio measures how much of your available credit you are using. Some credit scoring models only consider revolving lines of credit, while others include loans, mortgages, and even your bank account balance alongside credit card debt.
The Mix of Credit Accounts
Your credit accounts can typically be divided into good debt and bad debt. Good debt offers the borrower something valuable in addition to funding, such as education or a property. Examples include student loans and mortgages. Bad debt, on the other hand, refers to loans that only provide funding without any additional benefits. Payday loans and cash advances often fall into this category as borrowers typically use them to catch up on finances, which can lead to accumulating more debt.
Hard Credit Inquiries
Applying for a loan or credit card requires a hard credit check, which lenders use to assess your current financial situation. Each hard credit inquiry can lower your credit score by around five points, as recorded by the credit bureaus. It’s important to note that payday lenders usually request an official credit report before approving a loan, resulting in a hard credit check. However, if you obtain a cash advance from your credit card account, it won’t require a hard credit check.
How to Pay off Cash Advances or Payday Loan Debt Faster
If you find yourself locked into a payday loan or cash advance, don’t worry! We’re here to help you navigate through this situation. The best course of action is to simply pay off your balance. By doing so, you’ll gain valuable experience and know to search for better options in the future. While you’re working towards paying off your debt, we have some helpful tips that can make the process easier. These tips can also be applied to other debts like credit card balances, past-due loans or bills, student loans, car title loans or auto title pawns, bank loans, and personal installment loans.
Pay More Than the Minimum Amount Due
A great way to pay off your debt faster is by contributing more than the minimum amount due each month. The interest rate charges are often based on the current balance of your loan. By chipping away at your balance, you reduce the amount available to charge interest on, saving you money in the long run!
Avoid Applying for New Credit
While you’re focused on paying off your debt, it’s important to avoid applying for new lines of credit. Concentrate on eliminating your existing debt before taking on any new balances.
Important! What You Should Do Before Applying for a Short-term Payday Loan or Cash Advance
Before you commit to multiple payday loans or advances, it’s worth considering some alternatives. Here are some helpful options you can explore:
Credit Counseling
Prior to your debt becoming overwhelming, consider working with a financial advisor or credit counseling agency. They can provide valuable tips on budgeting and reorganizing your financial plan to suit your needs.
Negotiate Debt
Instead of immediately opting for debt settlement, you could attempt negotiating with your creditors to reach a settlement or management plan. Keep in mind that while debt settlement eliminates your debt, it can have a significant impact on your credit score. Debt management, however, offers alternatives such as loan rollovers or refinancing that may be less damaging to your credit. When it comes to credit card debt, reaching out to the customer service department and inquiring about current promotions may result in discounts or added perks.
Try Debt Consolidation
Instead of relying on payday loans, consider a debt consolidation loan. This type of loan allows you to merge all your existing debts into one monthly payment. Depending on your credit score, you might even qualify for additional funding that can be accessed on the same day. Debt consolidation loans are offered by banks, credit unions, and private direct lenders.
Explore Local Resources
There are numerous community and government funding programs available to assist low-income families. Visit your local government’s website to explore state and federal assistance programs that you may be eligible for.
Request Payment Extensions
If you’re considering a payday loan or cash advance to catch up on a bill, it’s worth contacting the service provider directly to inquire about extension options. Often, lenders are willing to adjust terms and work with borrowers to prevent loan defaults!
Frequently Asked Questions: Borrowing Money With a Cash Advance vs. Payday Loan
What are the typical fees associated with payday loans and cash advances? Payday loans often have fees based on the borrowed amount, while other advances may include a flat fee or a percentage of the cash advance amount. How quickly do I need to repay a payday loan versus a credit card cash advance? A payday loan typically requires repayment by your next payday, whereas credit card cash advance terms can vary based on your credit agreement or employer policies. Can I extend the repayment term if I can’t pay back on time? Some payday lenders and credit card cash advance services may allow extensions, but keep in mind that they could come with additional fees and a higher interest rate. It’s important to note that extending your terms may significantly increase your cash advance or payday loan debt. Are there any state regulations that apply to payday loans or cash advances? Yes, many states have regulations that limit the interest rates, fees, and terms of payday loans and cash advances. It’s important to check the laws in your state. How does a payday loan or cash advance affect my credit score? A payday loan usually doesn’t require a credit check, so it may not affect your credit score unless you fail to repay. Cash advances can affect your credit score if they are not repaid since they are typically associated with your credit card account. What happens if I can’t repay a payday loan or credit card cash advance? Failure to repay can lead to increased fees and interest, collection efforts, and negative impacts on your credit score. Are there any alternatives to payday loans or advances for emergency funds? Alternatives include personal loans, borrowing from friends or family, or seeking funds from community programs or non-profits. Is there a difference in the application process for payday loans vs. cash advances? Payday loans usually require proof of income and a bank account, while cash advances are typically accessed through your existing credit card without an additional application process. Can I take out multiple payday loans or advances at the same time? This depends on the lender’s policies and state regulations, but it is generally not advisable due to the risk of accumulating debt. How do I choose between a payday loan and a credit card cash advance? Consider factors like the amount of money you need, the fees and interest rates, how quickly you can repay the loan, and the potential impact on your credit score.
Welcome to Pachyy’s Insight on Cash Advances and Payday Loans!
At Pachyy, we believe in providing you with all the information you need to make confident financial decisions. It’s essential to thoroughly research and compare your loan options, understand the terms, and consider how they may impact your financial well-being before applying for any credit. Our goal is to empower you with knowledge and tools so you can choose the credit solutions that best suit your needs. We want you to make choices with confidence and clarity. If you’re interested in learning more about budgeting, managing your finances, and other useful tips, visit the Pachyy dojo for a wide range of free resources! For further reading, check out these references: