Cash Advances Explained: Payday Loans vs. Credit Card Advances

What is a cash advance?

A cash advance is a short-term loan or withdrawal that provides cash quickly, often in exchange for a fee and interest. The term is used broadly and covers both payday loans (sometimes called cash advances) and credit card cash advances. Though they share the name, these two products differ significantly in how they work, their costs, and their impact on your finances.

Payday loans are small, short-term loans that are typically due on your next payday. They are often marketed as 'cash advances' because they provide quick access to cash. Credit card cash advances, on the other hand, let you withdraw cash against your credit card's available credit, either at an ATM or through a check. Both are expensive ways to borrow, but their fee structures and interest rates vary.

• Payday loans are short-term loans due on your next paycheck.
• Credit card cash advances are withdrawals against your card's credit line.
• Both typically come with high costs and immediate interest charges.

Sources: Federal Trade Commission, Chase

Payday loan cash advances: how they work and costs

Lenders often require a post-dated check or access to your bank account for repayment. They typically do not require a credit check, making them accessible to borrowers with poor credit.

The cost of a payday loan is a flat fee, typically $10 to $30 per $100 borrowed. This translates to an annual percentage rate (APR) of roughly 400% or higher.

• Typical fee: $10 to $30 per $100 borrowed
• APR: approximately 400% or higher
• Credit check: usually none
• Repayment: full amount due on your next payday
• State regulations: payday loans are outlawed or restricted in many states

Sources: Federal Trade Commission, InCharge Debt Solutions, Tilt, Investopedia

Credit card cash advances: how they work and costs

A credit card cash advance lets you withdraw cash using your credit card. You can get cash at an ATM or via a convenience check that is treated as a cash advance. Unlike purchases, cash advances typically have higher APRs, no grace period, and start accruing interest immediately.

Most credit card issuers charge a transaction fee for cash advances, often 3% to 5% of the transaction or a flat fee (such as $10). Because interest begins immediately, even a short-term cash advance can be costly.

• Typical fee: 3% to 5% of the transaction or a flat fee
• APR: higher than purchase APR, often around 25% to 30%
• Grace period: none; interest starts immediately
• Access: ATM or convenience checks
• Impact on credit: can increase credit utilization

Sources: Chase, Experian, Investopedia

Comparing costs: APR and fees with examples

When comparing the cost of a payday loan cash advance to a credit card cash advance, the APR is the more meaningful measure because it accounts for fees and interest on an annual basis. However, the borrowing term differs greatly: payday loans are due in two to four weeks, while credit card advances can be repaid over many months.

The table below compares typical APR and fee structures for both types. These are illustrative and vary by lender, state, and card issuer.

Sources: InCharge Debt Solutions, Tilt, Chase, Experian, Investopedia

When to avoid a cash advance

Cash advances are among the most expensive ways to borrow, and they can create a cycle of debt. Payday loans, in particular, are designed to be repaid quickly, but many borrowers struggle. According to the Consumer Financial Protection Bureau, payday loans can trap consumers in debt because many borrowers roll over loans or take out new loans soon after repayment. In fact, a CFPB study found that half of online payday borrowers rack up an average of $185 in bank penalty fees due to overdrafts or failed debit attempts.

Credit card cash advances are also risky because they lack a grace period and have high APRs. If you carry the balance, interest compounds, making the debt grow quickly. Before taking any cash advance, consider whether you can afford the fees and interest, and whether the emergency justifies the cost.

• Payday loans can lead to a debt cycle: many borrowers roll over or take out new loans.
• Bank penalty fees add to the cost: half of online payday borrowers incur an average of $185 in overdraft or failed transaction fees.
• Credit card advances: no grace period and high APRs mean interest starts immediately.
• If you cannot repay a payday loan on time, avoid it.

Sources: Consumer Financial Protection Bureau

Alternatives to cash advances

Because cash advances are costly, it is wise to explore alternatives before borrowing. Options include borrowing from friends or family, negotiating a payment plan with creditors, or seeking assistance from nonprofit credit counseling. Some employers offer payroll advances, and some credit unions offer small-dollar loans with lower rates.

For credit card users, it may be cheaper to use your card for a purchase rather than a cash advance, as purchases often have a grace period and lower APR. However, if you need cash, consider a personal loan from a bank or credit union, which may have a lower APR and longer repayment term.

• Ask your employer for a payroll advance or paycheck advance.
• Contact you creditors to set up a payment plan.
• Use a credit union or bank for a small personal loan.
• Borrow from family or friends with a written agreement.
• Use a credit card for a purchase instead of a cash advance, if possible.

Sources: Investopedia

Side-by-side category and decision-criteria matrix

Deciding between a payday loan cash advance and a credit card cash advance depends on your situation and the costs involved. The table below compares the two categories based on key decision criteria: cost, speed, credit requirements, and repayment structure.

In general, a credit card cash advance is likely to be cheaper if your credit card limit is sufficient and you can repay the advance within a few months. A payday loan may be easier to qualify for if you have no credit history, but the APR is dramatically higher and the due date is extremely short.

Sources: InCharge Debt Solutions, Tilt, Chase, Experian, Investopedia