What is a cash advance and how do they work?
A cash advance may seem like an easy way to get cash fast, but it can be costly. CNBC Select reviews the basics of a cash advance: what it is, the terms and fees and better alternatives.
Updated Wed, Dec 2 2020Alexandria WhiteSHAREShare Article via FacebookShare Article via TwitterShare Article via LinkedInShare Article via Email
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A cash advance may seem like an easy way to get cash fast, but it can cost you a lot of money in interest and fees. Before you take out a cash advance, familiarize yourself with the terms, so you’re not hit with an unpleasant surprise. And better yet, avoid a cash advance altogether.
Below, CNBC Select reviews the basics of a cash advance: what it is, the terms and fees, as well as better alternatives for getting cash quickly.
How a cash advance works
A cash advance is basically a short-term loan offered by your credit card issuer. When you take out a cash advance, you’re borrowing money against your card’s line of credit. You can typically get a cash advance in a few different ways:
- At an ATM: If you have a PIN for your credit card, you can go to an ATM and get a cash advance. If you don’t have a PIN, you can request one from your card issuer. Note that it may take a few business days to receive a PIN, and there are often limits to the amount of cash you can withdraw from an ATM.
- In person: Visit your bank and request a cash advance with your credit card.
- Convenience check: Your credit card may have come with convenience checks, which can be used to write a check to yourself. You can then cash it or deposit it.
Cash advance terms and fees
A 24 hour cash advance is an easy way to get cash fast, but they often come with hefty fees that outweigh any benefits. Before you take out a cash advance, review the terms so you’re aware of the high charges you’ll likely incur.
- Cash advance APR: Cash advances carry a separate, and often higher, interest rate than purchases or balance transfers. For example, the Citi® Double Cash Card has a 13.99% to 23.99% variable APR for purchases and balance transfers, but a 25.24% variable APR for cash advances.
- Cash advance fee: Your card issuer often charges a cash advance fee, which is typically 3% or 5% of the total amount of each cash advance you request. For example, a $250 cash advance with a 5% fee will cost you $12.50.
- ATM or bank fee: If you use an ATM or visit a bank, you can expect a fee for taking out a cash advance.
- No grace period: Cash advances don’t benefit from a grace period. That means you will be charged interest starting from the date you withdraw a cash advance. That’s different from when you make a purchase with you card, and the issuer offers a grace period of at least 21 days where you won’t incur interest if your balance is paid in full by the due date.
- Separate credit limit: Cash advances often have a separate credit limit that’s a portion of your overall credit limit. You may only be able to take out a few hundred dollars.
The cost of a cash advance
Cash advances have numerous terms and fees, as mentioned above, but you may wonder how much the whole thing may cost. Here’s an example:
How much a $500 cash advance can cost
|Cash advance withdrawal||$500|
|Cash advance fee (5%)||$25|
|Cash advance APR (26.74%)||$72 in interest|
|Estimated time to pay off the cash advance||12 months|
|Total interest and fees||$99.50|
You wind up paying $99.50 in interest and fees if you took out a $500 cash advance and only paid $50 a month.
Alternatives to cash advances
Taking out a cash advance may seem like a good idea in the moment, but it can quickly lead you to rack up debt. We recommend avoiding a cash advance altogether and opting for some alternative options that have better terms.
- Borrow from family or friends: You can ask family or friends for a loan. While it can be uncomfortable to ask, this can be the most cost-effective way to get the cash you need. Make sure you create a repayment plan to keep your relationship on good terms.
- Take out a personal loan: Personal loans usually offer better terms than a cash advance, and you can have access to more cash if you have good credit. With a personal loan, you usually can pay back the loan at a fixed interest rate that’s much lower than the APR charged by credit card issuers.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.