Payday loans and credit card cash advances are both considered to be more expensive forms of finance and they are generally reserved for emergency situations. However, there may be occasions when these forms of finance are necessary for people, and it's a good idea to know which one could suit their circumstances best.
If someone has a credit card they can withdraw cash from an ATM. They can also apply for a payday loan to have the money transferred to their account on the same day, or sometimes within the hour. Find out more in this guide.
Are you struggling financially?
If you're struggling financially and would like to speak to someone for free financial advice, information and assistance you can call the Financial Counsellors hotline on 1800 007 007 (open from 9:30am to 4pm, Monday to Friday). If you are suffering financial problems related to the coronavirus pandemic you may be eligible for additional support. Find out more here: https://www.finder.com.au/coronavirus-financial-help
⚠️ Warning about Borrowing
Do you really need a loan today?*
It can be expensive to borrow small amounts of money and borrowing may not solve your money problems.
Check your options before you borrow:
- For information about other options for managing bills and debts, ring 1800 007 007 from anywhere in Australia to talk to a free and independent financial counsellor
- Talk to your electricity, gas, phone or water provider to see if you can work out a payment plan
- If you are on government benefits, ask if you can receive an advance from Centrelink: Phone: 13 17 94
The Government's MoneySmart website shows you how small amount loans work and suggests other options that may help you.
* This statement is an Australian Government requirement under the National Consumer Credit Protection Act 2009.
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How does a payday loan and credit card cash advance work?
Both payday loans and credit card cash advances are types of credit that can be used for whatever someone needs. There are no specific restrictions on how someone can use these funds.
Payday loans involve customers applying with a lender for a specific loan amount. They will be sent the funds, if they're approved, generally within 24 hours. They then make repayments according to the repayment scheduled outline in their contract, with usual terms ranging from 16 days to one year.
Cash advances are where borrowers withdraw cash from their credit card or transfer money from their credit card to an account. As this is not a purchase, they are charged a higher rate, which is usually above 20% p.a. It becomes part of their outstanding balance, of which they have to make a minimum payment monthly to keep the credit account in good standing.
What are the risks of payday loans?
- Unaffordable repayments. Payday loans are an expensive way to borrow money and should only be used as a last resort. Check the size of each repayment and ensure you will be able to pay it on time. Unaffordable repayments can lead to late fees that will only make things worse.
- High rates and fees. Rates and fees on payday loans are high but there are rules in place so be sure to check your lender is not charging you more than ASIC allows. Also, look at what you would be charged if you are late on a payment or if you default on the loan altogether.
- Unreputable lenders. All Australian lenders should be accredited by ASIC. Check for a credit licence on the ASIC Register and ensure that the lender is easily contactable.
- Impact on credit score. Every loan application shows up on credit reports. While lenders might not consider credit history, applying for lots of loans within a short period can have a negative impact on your credit score in the future.
Which is more expensive?
Both credit card cash advances and payday loans are costly forms of credit. Receiving an advance from a credit card will set someone back between 20-24% p.a. A payday loan of less than $2,000 will cost an establishment fee that is 20% of the amount they borrow and a 4% monthly fee.
Keep in mind the cash advance rate is an annual rate whereas the payday loan is not.
If someone pays the cash advance back quickly it can be cheaper, but if they only make the minimum repayment then they may want to consider a payday loan. This is because their ongoing repayments will pay the money back entirely in that set term, whereas the cash advance could be an ongoing debt.
The differences between payday loans and cash advances
| Features | Payday loans | Cash advance |
|---|
| Fees | 20% establishment fee + 4% monthly fee | Approximately 1.5-4% |
| Interest | Interest is charged as fees as above | Approximately 19-22% p.a. |
| Terms | Vary between 14 days and 12 months | Ongoing line of credit, no set terms |
| Eligibility | Flexible criteria. Bad credit, Centrelink, unemployed accepted. | Need to be employed and have good credit. |
Weighing up your options
Pros and cons of applying for a payday loan
- Availability
Most payday loans require a minimal amount of criteria needed to be approved. This includes income, age and residency requirements. - Turnaround
Customers will usually receive an answer instantly or within 5 minutes, and the money within a day or two. - Short terms
The requirement for these loans is that they are paid back quickly, leaving customers with no extra debt to worry about.
- Fees
Although the rates are mandated by the government, they still are higher than a typical personal loan would be. Plus the fees can mount up if someone is late on a repayment. - Overall cost
In general, the overall amount of money someone will spend for this service makes it a non cost-effective way to handle finances.
Pros and cons of withdrawing cash with a credit card
- Accessibility
There are no additional applications needed with a credit card cash advance. Customers only need to find an ATM and withdraw the cash they need. - Concise billing
As the cash advance is part of a credit card billing, the borrower won't have the worry of a new account. - Flexible repayments
So long as the borrower doesn't mind the accrued interest, they can pay off a credit card cash advance at their convenience.
- Interest rates
The interest rate charged for a credit card cash advance is considerably higher than what someone would pay for a standard personal loan. They'll also accrue interest from the moment they make the cash advance. - Overall cost
Like the payday loan, the overall cost of the cash advance makes it an option someone should think twice about before using.
Credit cards with low cash advance rates
How to know what to apply for
Even after understanding both products, some prospective applicants might still be unsure which one is right for them. There are several questions people who are considering a cash advance or a payday loan should consider prior to submitting an application:
- Do I have bad credit? If the answer is "yes" and that person doesn't already have a credit card, then they may not be eligible to be approved for a credit card, but would likely be approved for a payday loan. They should review the eligibility criteria of the products they are interested in before submitting an application. If they are weighing up their options of a credit card and a payday loan and they have bad credit, they may find they are only eligible for the latter.
- Do I already have a credit card? If the person looking for emergency cash does already have a credit card, they should check what interest rate they will be charged for taking out a cash advance. They should also check how much credit they have left in their account and if it will be sufficient for what they need. They can then use this information (the interest rate) to compare it with potential payday loan options and see which one will be more expensive based on when they can repay the money.
- When will I be able to repay the money? This is an important factor to consider. Payday loans are designed to be paid in the short-term, so before applying applicants should make sure that they can afford the repayments set out by the lender. If they aren't sure when they can repay, they should be aware that a credit card cash advance can easily get out of hand if it isn't repaid quickly – there is no fixed repayment term and the interest can just keep rolling over, costing a lot of money.
It’s always important to compare options before applying for a payday loan or taking cash out on a credit card. Many financial experts advise to explore other avenues before applying for a payday loan or withdrawing money on a credit card. Due diligence is a must with both products.
HELLO
IAM LOOKING FOR A $100,000.00 LOANS WITH MONTHLY PAYMENTS
Hi Kenneth,
Payday loans are usually for smaller amounts, below $2,000, and there are no loans currently available for comparison on finder.com.au of this size.
I’m sorry I couldn’t be of more assistance,
Elizabeth
just wondering how and where you apply online to receive a credit card cash advance can you use your personal bank?
Hi Angie,
Thanks for your question.
A credit card cash advance involves you withdrawing cash from an ATM using your credit card. To do this, you’ll need to hold a credit card or apply for a card and then withdraw the cash. If, however, you were looking for a cash advance loan, you can compare and apply for one on this page.
I hope this has helped.
Thanks,
Elizabeth