A cash advance is a quick way of acquiring financing when you're in a pinch. It's fast and easy, but it can become a debt trap, especially if you don't know what you're doing.
Cash advances carry a lot of costs and limitations, so they are not necessarily the best option most of the time. It's recommended that you get a traditional loan instead. That said, how does a cash advance work, and when should you use it?
How does cash advance work?
A cash advance is a type of loan you can take from your credit card issuer in most cases. As with the other purchases, the cash advance will appear as a transaction on your monthly card statement, and the interest will continue to be charged until you pay off the whole sum.
Its terms are entirely different from your other loan purchases, and mostly, they tend to be disadvantageous. Cash advances don't have grace periods, and the interest will start to accrue the day you take out one. That's why it's not the best option for financing out there. You should only use it when you need cash in your hands right now and don't have any other option.
For example, you're in a store that doesn't accept card payments, and you only have your card. To complete the purchase, you need some cash, and the quickest way possible to get money in that situation is to get a cash advance.
But suppose you're in a different situation, and you can opt for another financing method. We'll be talking about some cash advance alternatives that you might want to check out before going on ahead and getting a cash advance.
Payday Loans
A payday loan is short-term financing where a lender offers you a loan based on your next paycheck. The principal amount is typically a percentage of your next salary, and they usually charge a pretty steep interest rate. It's to mitigate the risk for lenders for offering short-term financing.
These loans typically have high-interest rates and require no collateral, categorizing them as unsecured loans. They have little to no credit checks, so it's a huge plus for people who need immediate funding but with a bad credit score.
However, they tend to have a bad reputation and are considered predatory because of the high interest, lack of credit checks, and hidden fees. Not to worry, though, as predatory lenders are in the minority, and are very easy to spot.
The interest is fixed for payday loans because they are usually meant to be paid off in one lump sum when the customer gets their paycheck. Lenders don't categorize them as interest rates but as flat fees.
Usually, payday loans aren't reported to credit bureaus, even if they are overdue in repayment. But don't be careless with them because it may be filed once the debt is passed on to the collection agency.
Personal Loans
If you don't want to take a cash advance, a personal loan can be a great alternative. It's a kind of loan that you pay monthly in installments along with interest. It's fast and easy to get approved for, but the approval process sometimes takes weeks. However, online lenders who offer personal loans can get you the money quickly.
Since they operate online, it's easy to find one. You can get a loan online as long as you have a device that can connect to the Internet.
Once you're approved for a personal loan, you'll receive the money in your checking account. If you're taking out a personal loan to refinance existing debt, you can ask your lender to pay for the bills directly.
One of the main advantages of personal loans over cash advances is that they have a grace period of up to 15 days. And, if you have a good standing with your lender and have a stellar credit score and clean credit history, you'll enjoy a much lower interest rate and shorter repayment term.
Peer-to-Peer Lending
Peer-to-Peer (P2P) lending enables borrowers to take out loans directly from an investor on an online platform. P2P lending websites set the rates and terms of the transaction and help you find investors for you. The investor will set up an account to deposit their money.
The site will then rate this financial profile and determine the interest the applicant will pay. Loan applicants can review the investor's offer and decide whether or not to accept it. The money transfer is usually done on the website. Investors and applicants can haggle if they want to, or they can let the process be entirely automated.
Final Words
Cash advances can be a great help if you're in a pinch, whether due to time restrictions or financial troubles. However, they tend to be expensive if you don't repay them in due time. So, if you have the time and money to choose an alternative, pick one from the options listed above. Each of those choices is suitable for specific situations, so you might want to review them to find which of them works best for you.
* This is a contributed article and this content does not necessarily represent the views of sciencetimes.com
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