Should you take out a cash advance?

Cash advances can be a popular way to borrow cash fast without going through online applications and credit monitoring. However, knowing the pros and cons of taking out cash advance loans and the potential fees and charges you could face is essential. 

In this article, we’ll assess whether you should take out a cash advance and the potential risks and precautions of using quick loans. 

Let’s get to the following commonly asked questions: 

• What is a cash advance?
• When should you consider a cash advance?
• What are some tips for managing cash advances? 
• What are the potential risks and precautions? 

Q1. What is a cash advance?

A cash advance is when you withdraw money from your credit card rather than filling out a loan application. You typically receive the funds as cash or by money transfer to your bank account. 

Here are the types of cash advances typically used in Australia: 

ATM cash advance. This is the most common type of cash advance in Australia. Simply use your credit card at an ATM to withdraw fast cash. The total amount you can withdraw depends on your card issuer and cash advance loan term.

Bank over-the-counter cash advance. Visit a bank branch to request a cash advance over the counter. They will then provide you with an instant cash loan in physical money or your checking account. 

Online cash advance. You can get credit card cash advances online. This depends on the credit card companies you use. Check your online banking portal to see whether you’re eligible for quick cash. 

A cash advance and a payday loan are both short-term lending options that provide quick access to funds but differ in their sources and terms. A cash advance is typically associated with credit cards, allowing cardholders to withdraw a portion of their credit limit as cash. 

On the other hand, a payday loan involves borrowing a small amount of money with the agreement to repay it, plus fees, on your next payday. While both options offer fast cash, cash advances are tied to your existing credit line, while payday loans are standalone loans, often requiring a post-dated check or access to your bank account.

Read more: How to negotiate credit card debt settlement yourself in Australia?

Q2. When should you consider a cash advance?

A cash advance from credit card issuers should be a last resort. Fast cash loans incur higher costs and can lead to financial hardship if not paid back quickly. Rates and fees are the highest out of all loans for bad credit and could lead to a debt spiral. 

Here’s when you should consider a cash advance as a short-term solution. 

Emergency expenses. If you're facing a true emergency and need financial assistance and immediate access to cash, an advance could provide a solution, as It allows you to skip the application process. This might include medical emergencies, urgent car repairs, or unexpected travel expenses.

Lack of alternatives. If you have exhausted other borrowing options like a personal loan, a line of credit, or borrowing from friends and family, fast loans from your credit card company might be one of the few remaining options.

Limited access to funds. In some cases, you might be in a location where your debit card isn't working, or you don't have access to your regular bank account. If a credit card is your only source of funds, a cash advance could be considered to withdraw cash.

Read more: How to check my credit history for free?

Q3. What are some tips for managing cash advances?  

Managing cash advances is essential to avoid falling into a harmful debt cycle. Minimise the costs of fast cash loans by using these money management tips: 

Understand the costs. By reading up on the fees, interest rates, and terms of cash advances, you can understand the total cost of borrowing and plan your future repayments.  

Use only in emergency situations. Only use cash advances for financial emergencies. Avoid using them for non-essential expenses or impulse buys. 

Borrow what you need. Only borrow the smallest amount possible to cover your emergency expense. Don’t take out extra cash that you don’t need to avoid extra fees and charges. 

Pay it off quickly. Try to repay your cash advance as soon as humanly possible. The longer you have your high balance, the more interest you’ll pay.

Create a repayment plan. Set up a plan for repaying the cash advance. Do so by calculating how much you must pay monthly to clear the debt within a reasonable time. Consider using a repayment calculator to set up a budget. 

Read more: How to consolidate credit card debt?

Q4. What are the potential risks and precautions? 

While some choose to use cash advances as debt consolidation loans, they are the riskiest way to pay off your debts. As an unsecured personal loan, using cash advances can lead to high credit card fees that can be impossible to pay back. 

Here are the potential risks of taking out a cash advance and the precautions to avoid falling into a debt cycle. 

High costs 

Risk: Cash advances often have higher interest fees and rates than regular credit card transactions. This can lead to high financial costs over time.

Precaution: Before taking a cash advance, understand the transaction's fees and interest rates. Calculate the total cost of borrowing to make an informed decision.

Immediate interest accrual

Risk: Interest on cash advances starts accruing immediately after the transaction, without the grace period that often applies to regular credit card purchases.

Precaution: Be prepared to start paying interest from the day you take the cash advance. Try to repay the balance as soon as possible to minimise the interest charges.

Impact on credit score

Risk: Frequent cash advances can increase your credit card utilisation, negatively impacting your credit scoring. High utilisation rates can also impact your creditworthiness, making it harder for you to borrow money in the future. 

Precaution: Monitor your credit card utilisation and keep it below 30% to maintain a healthy credit score. Avoid using cash advances too often. 

When considering cash advances and payday loans, it's essential to be aware of potential risks and take necessary precautions. The repayment period for both options is short, often within weeks, which can lead to financial strain if not planned for. 

Monthly fees associated with payday loans can accumulate quickly, significantly increasing the cost of borrowing. Loan amounts for both options are usually modest, and while they don't typically require a credit check, not repaying on time can negatively impact credit reports. 

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Summing up

Taking out a cash advance can be risky, especially if you are already in a cycle of debt. Carefully evaluating your financial situation and exploring alternatives before opting for these options is crucial to avoid potential pitfalls. 

The interest rates are typically much higher than a standard loan, even when you borrow from responsible lenders. It’s essential to borrow responsibly and seek financial advice if you struggle to pay off your short-term loans. 

If you liked this article, stay updated with the WeMoney blog. We regularly post financial advice for our readers to help you stay on top of your personal finances. Check out our latest article: “How to get a home loan with no deposit.”

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Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation.