If you need extra money, two options you might be considering are cash advances and payday loans. The terms are often used interchangeably which can be confusing for consumers. They are both short term unsecured loans, and one may be better than the other depending on your situation. So it’s important to know the difference.
A cash advance is a term used for cash paid out from a credit card. Not all credit cards offer it, and if you don’t already have one, then you would have to apply and get approved first. The credit card company may give you cheques or the company will provide you with a pin for your card. Once you get the card and pin, you can use the credit card at an ATM to withdraw money. If you don’t already have a credit card, this process can take some time.
The amount of the cash advance is then added to your credit card balance. Credit card companies charge different interest rates for cash advances that are higher than your normal interest rate for purchases. The transaction is also subject to additional fees, usually from both the credit card company and the ATM. The cash advance is covered by the terms and conditions of your credit card agreement.
One of the biggest differences between cash advances and payday loans is the interest and how it is applied. With credit cards, interest compounds daily and payments are usually applied to the oldest part of your balance first. Payments may also be applied to the purchases you’ve made with your card first before being applied to the cash advance. Both scenarios can result in more interest charges at a higher rate. If you aren’t careful, you can end up paying lots more interest than you intended and it could potentially take months or years to pay off your cash advance.
Payday loans are given by lending companies that may offer other services too. Some companies call their products “cash advance loans” since they are an advance on your pay, and that is sometimes confusing. There are less stringent or possibly no credit requirements since you are borrowing against your paycheck. You will need to provide pay stubs, bank account information, and any information necessary for the lender to verify your employment. Depending on the lender you can apply in person or apply online. The application process is fast, usually 15-30 minutes and many people get instant approval. Once you sign the necessary documents, the money is deposited into your bank account normally within one or two business days. Your loan is repaid from your bank account either by post-dated cheque or an electronic transaction. Loans are for small amounts usually up to $1500.
One key difference between cash advances and payday loans is that with a payday loan, your repayment amount is a set dollar amount. Payday loans have higher interest rates but loan periods are very short, generally less than 30 days. You know exactly how much you are paying back and when. Credit card payments can vary from month to month and you’ll pay interest over and over on the same advance until it’s paid off.
Payday loans offer an alternative for people who don’t have credit cards, have cards with very low credit limits or cards that don’t allow cash advances.