When you need cash fast, your first thought might be to turn to a credit card cash advance. It’s fast, it’s easy, and often your credit card issuer seems to be begging you to borrow by sending you offers and blank checks. However, cash advances come with many costs and limitations. Therefore, before going this route, be sure to investigate alternative financing, such as the methods listed below. But first, let’s look at the terms of a credit card cash advance, 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 don’t come with an interest-free grace period, have a higher interest rate than regular purchases, and carry transaction fees.
- The amount of the advance is generally 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 common 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. Also, the interest rate is usually a bit higher for cash advances than for regular purchases.
Credit Card Cash Advance Terms
Details of 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 (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 wishes to pay first. For Military Star Rewards account holders, Chase applies the minimum payout to the balance with the highest APR. Any payout above the minimum is applied “in a manner 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’s very easy to get caught up in an ever-increasing spiral of debt.
Cash advances are sometimes limited to a percentage of the cardholder’s credit limit. Each 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 which part of your balance to apply any payment above the minimum monthly 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 investigating other sources of income. Depending on your creditworthiness and 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 lending can come with a lot of emotional strings. It will help if you keep things business-like: use a well-executed written agreement that spells out all the terms, so both parties know exactly what to expect regarding cost 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 rates on personal loans (see below). The loan limit is 50% of funds up to a maximum of $50,000 and repayment is five years or less. There are no credit checks and payments can be set up as automatic deductions from the borrower’s paychecks. Keep in mind that while you’re borrowing funds from your 401(k), they don’t earn any return on your investment, which could affect your retirement.
Exception to the COVID-19 pandemic for 401(k) loans and early withdrawals
An exception was made to this lending limit in 2020 under that year’s CARES (Coronavirus Aid, Relief, and Economic Security) Act, passed in March 2020 in response to the COVID-19 pandemic. Under the CARES Act, 401(k) between March 27 and September 22, 2020, borrowers could withdraw 100% of their 401(k) account, up to $100,000.
Additionally, Congress has authorized 401(k) holders to receive up to $100,000 in distributions without being affected by the 10% early withdrawal penalty for those under age 59.5. If you received distributions at the start of 2020, you had to pay income tax on the withdrawal. But the IRS allowed a three-year repayment period. This means you can pay these taxes over time, or you can repay the distribution as a rollover contribution.
3. Roth IRA
Although 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.. Because contributions to a Roth IRA are made with after-tax dollars, Internal Revenue Service (IRS) rules allow you to withdraw this money at any time without penalty and without paying additional tax. If you’re under 59.5, make sure you don’t withdraw more than you contributed, even if the account size has increased. Earnings from your contributions are subject to taxes and penalties.
4. Bank personal loan
For a borrower with good or excellent credit, a personal loan from a bank may be cheaper than a credit card cash advance. Also, the payout will be faster than the minimum credit card payments, further reducing 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 situation. However, even if you face the added hurdle of bad credit, you can still access emergency loan options.
5. Collateral 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 provide loans against the value of a trust or certificate of deposit (CD).
6. Salary advance
Many employers offer low-cost payday advances as an alternative to more expensive traditional payday loans. 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 lending
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 out at around 30% APR, plus a 5% loan fee.
8. Payday loan or title loan
An auto title loan should be considered a last resort due to its astronomical cost. Like title loans, payday loans typically charge three-digit interest rates, from 300% to 500% and higher.The fees on both types of loans can be so unaffordable for cash-strapped borrowers that many renew their loans multiple times, at an ultimate cost of many times the original loan amount. These two are probably the only loans that the credit card cash advance is superior to, except in states where interest rates on this type of financing are very tightly capped.
Each short term loan option has its pros and cons. A cash flow crunch is a high stress situation, but that doesn’t mean you should 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 timeline, another type of financing may be preferable to a loan on your credit card. Credit card cash advances are expensive enough that they are only considered in a real emergency.