You’ve probably heard a lot of terms in the arena of finance that seem to say essentially the same thing, or at least imply they’re the same thing. What’s the difference between a cash advance loan and an installment loan? Aren’t they essentially the same thing? They are both certain types of loans that can allow you to borrow money, but they are different in their terms, repayment schedules and sometimes even their fees.
Standard Cash Advances
Let’s talk about a standard cash advance first. Typically the term is applied when you borrow money from your credit card. Many people don’t know they can do this, but you can get cash using your credit card, and you don’t even need to go to the bank to do it. Most Automatic Teller Machines (ATM) have cash advance services as part of their function.
Cash advances from credit card companies also tend to be limited in the amount a person can borrow. Let’s say you have a maximum limit of a thousand dollars on your credit card and there is no current balance on it. Credit card companies typically limit cash advance availability to about 25% of your limit. In other words, you would not be allowed to get any cash advance from your credit card of more than $250 at a time, and once you hit that particular limit, then the credit card will not allow you to get cash, even though you can still make purchases using the remaining balance.
Cash obtained using your credit card will generally have a different fee structure or interest rate (always read the fine print of your credit card statement, or ask your creditor for a list of terms regarding your card), many people make the error of assuming their interest rate for a cash advance will be the same is purchasing goods or services with their credit card.
Cash Advance Interest Rates
In addition to the different interest rate structure, there is usually a flat fee for using a cash advance service of about 5%, which means you’re essentially being charged twice for borrowing cash against your credit card, and there are minimum charges for cash advances, usually about $10, even if all you want to borrow is $20.
Why do banks do this? There is a generally accepted axiom in the banking industry that cash advances are an indicator that the person utilizing one probably will not pay it back, and thus it is considered a higher risk loan. This is similar to insurance companies charging different rates to people who represent different kinds of risk. Most financial counselors will tell you that it is better not to get cash advances from your credit card, and make direct purchases. Some will even tell you that small cash advance online sites will have better rates and more realistic repayment structures and it would be better to utilize their services instead of taking out a cash advance in your credit card, mostly because the balance of the cash advance on your credit card will stay there until you pay it off, but will continue to accrue interest charges, whereas a personal installment loan or title loan will have the interest charges as part of the structure repayment process.