Cash Advance vs. Payday Loan: How Do They Differ?

Financial emergencies can strike at any moment, and even the best of us are not exempt from them. If you face an unplanned expense while being broke, getting money fast can be critical. Thus, you may consider applying for a payday loan or getting a cash advance.

These two are the fastest loan options available to borrowers in Canada and the US. Although they share some similarities, they also come with their distinguished features. Our comparison of a cash advance vs. payday loan will help you figure out which option will better meet your needs.

What Is a Payday Loan?

A payday loan is a small, short-term, high-cost loan for personal needs that is due by a borrower's next paycheck. Payday loans are typically up to $500 loan options, with some states limiting them to $1,000. As the repayment must be made in one lump sum, these loan amount caps make them easier to handle.

Payday loans can be used for any personal needs. They can help borrowers overcome small emergencies due to their fast funding times. On average, a loan till paycheck reaches a borrower's bank account in as little as one business day.

Another payday loan benefit is its accessibility. Payday lenders are quite lenient when it comes to a borrower's credit score. They don't conduct hard credit history checks, making their loans available to people who can't get a loan from traditional lenders.

However, payday loans are one of the most expensive debts. Their annual percentage rate can reach three-digit numbers. Although their short repayment terms make them relatively manageable, they still come with the risk of getting into a debt cycle.

What Is a Cash Advance?

The term "cash advance" has several commonly used meanings. The first one defines it as a form of debt that allows you to borrow money against your credit card balance. Such a cash advance doesn't require any preliminary application or verification. All you need is to have a valid credit card that allows money withdrawals. Then, you visit an issuer's ATM or store with your card on hand and get the needed amount in cash.

The second definition of a cash advance is an app-based loan that you can request via your smartphone. To get started, you need to install a cash advance app on your device. Such loans are more similar to payday loan options. They are also due by your next payday and are usually limited to $50 or $250. Some cash advance apps may also assess your electronic timesheet and let you borrow within the sum you've already earned.

The main difference between payday loans and cash advance apps lies in their price. Loans from cash advance apps are usually much cheaper. Some applications charge monthly membership fees, while others may ask borrowers to pay voluntary tips only. There are also popular cash advance apps that serve as a bridge between you and a direct lender. They are free for users, but lenders can set interest rates on their loan products.

What Is The Difference Between a Cash Advance and a Loan Till Payday?

Let's determine the difference between a cash advance and a loan till payday based on the following 5 criteria.

Application process. Payday loans require a borrower to go through a preliminary application process. It can be completed either online or in a lender's store, depending on the loan provider. App-based cash advances have a simplified application procedure that is completely online. A credit card cash advance comes with no additional application, provided that you already have a card.

Loan amounts. An average payday loan allows you to borrow up to $1,000, with some states limiting them to $300 or $500. A cash advance app loan is even smaller, with a maximum loan amount usually reaching $50 to $250, depending on the app. The amount you can get from your credit card depends on your credit card limit and additional issuer's restrictions.

Interest rates and fees. A payday loan APR can be over 400%. However, its cost is usually expressed in a flat fee, which is usually between $10 and $30 for each $100 borrowed. Loans from cash advance apps may either come with no fees or charge an extra $6 to $28 per transaction. If you use an app with a membership fee, its amount can be $5 to $10. A credit card cash advance commonly carries a withdrawal fee of up to 5% or $10, whichever is more. The average APR is about 24%.

Eligibility requirements. All three options have very relaxed eligibility criteria and are available with any credit score. There's no hard credit check you need to undergo to get the money. However, credit card cash advances are considered the easiest loans to get due to no preliminary application required. Of course, if you already have a valid credit card.

Funding times. You can get a payday loan within one business day, often on the same day you apply. This is also true for cash advance apps. However, some of them offer instant money funding on your linked bank account. A cash advance from your credit card is available to you from the moment you withdraw cash.

Payday Loan vs. Cash Advance: Which One You Should Choose

It's hard to answer this question without knowing your particular situation. Both a payday loan and a cash advance can help you overcome financial emergencies. However, you need to assess loan terms, interest rates, and disbursement times before making a decision.

Loans from cash advance apps are typically cheaper than payday loans or credit card cash advances. However, they offer limited loan amounts that may not be enough to cover your current needs. Payday loans are more expensive but offer higher amounts, making them more suitable for most financial emergencies. Credit card cash advances are faster and don't require you to apply and wait for approval. However, you may face high interest rates, especially if you intend to use cash advances as a long-term solution.

Summing up, the right option for you depends on your current financial situation, deadline, and the amount needed. Assess these factors thoroughly before choosing a borrowing option.

Considerations Regarding Payday Loans

A payday loan is a high-interest loan that also comes with short repayment terms. Therefore, it usually carries the risk of getting into a debt trap, especially if you are already struggling financially. Statistics show that one in five borrowers were forced to renew their payday loans or get a new one to repay previous payday loan debt. Therefore, you need to be sure you will be able to repay the loan on time before getting it.

Also, payday lending is banned in some states. Check your state laws to make sure you can legally get a loan from a payday lender in your region.

Pitfalls of Credit Card Cash Advances

A credit card cash advance differs much from your regular credit card purchases. First, there will be no promotional period. The interest rates accrue from the moment you withdraw cash. Second, an interest rate applied for such a cash advance is usually higher than those on regular purchases. Therefore, these loans should be repaid promptly.

Things to Consider Before Getting Loans from Cash Advance Apps

Although loans from cash advance apps can come with reasonable fees, the loan amounts offered are usually quite small. Make sure the amount offered by a particular app is enough to cover your needs. Also, pay attention to extra fees, funding terms, and disbursement times to ensure they meet your deadline.

Alternatives to Payday Loans and Cash Advances

As payday loans tend to be expensive, and cash advances can not always meet your needs, here are a few alternatives to consider.

0% APR Credit Cards

A 0% APR credit card allows you to purchase items without overpayment. To make it possible, you need to repay the borrowed amount within the set grace period. The exact length of an interest-free period depends on your credit card issuer. Commonly, it’s between 6 and 21 months.

Personal Loans

A personal loan is an installment loan offered by a traditional bank or credit union. It is more budget-friendly thanks to its flexible repayment terms. You can return the funds in equal monthly payments instead of repaying the loan in one lump sum. Loan amounts can be up to $50,000 or $100,000, depending on a borrower’s income. Personal loans usually come with low interest rates, which are between 5.99% and 35.99%. However, you need to have good credit to qualify.

Borrowing from Family or Friends

If you need a small amount till your next payday, ask your family or friends to lend you a helping hand. This borrowing option can help you get a loan deal with a low or no interest rate. Just make sure to repay the money on time to maintain a good relationship with the people you love.

Final Thoughts

When we compare a cash advance vs. payday loan, it becomes obvious that they are quite different. The main distinctions lie in the application process, loan amount, interest rate, funding times, and eligibility requirements.

Both payday loans and cash advances can meet your urgent cash needs. To determine which one to choose, assess your financial situation, deadline, the needed amount, and the ability to repay the funds.

FAQ

Are Payday Loans and Cash Advances Risky Options?

Both payday loans and cash advances can be risky if you approach them irresponsibly. Before getting a loan, make sure you understand its terms and can afford a loan payment.

Does a Payday Loan or a Cash Advance Affect My Credit Score?

In most cases, payday loans and cash advances don't affect your credit score as long as you repay them on time. They can only damage it if you default. Credit card cash advances can also affect your credit utilization ratio, making your credit score go down.

Is a Payday Loan Better Than a Cash Advance?

Neither is better, they are just different. A payday loan can provide you with a higher amount, while a cash advance can reach your wallet faster and be cheaper. Check out the other differences above to understand which option suits you more.