Payday loans and credit card cash advances: Which one is better, and more importantly, which one is worse.
If you find yourself in a situation where you need quick cash, you might find that you have a couple of options to choose from.
If you have a credit card you can simply withdraw cash from an ATM. You also have the choice of applying for a payday loan to have the money transferred to your account on the same day, or sometimes within the hour. Find out which one is better for your needs in this guide.
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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 you need or want. There are no specific restrictions on how you use the funds, making them suitable for a sudden car repair, groceries or even a weekend getaway.
Payday loans involve you applying with a lender for a specific loan amount. You will be sent the funds, if you're approved, generally within 24 hours. You then make repayments according to the repayment scheduled outline in your contract, with usual terms ranging from 16 days to one year.
Cash advances are where you withdraw cash from your credit card or transfer money from your credit card to an account. As this is not a purchase you are charged a higher rate, which is usually above 20% p.a. It becomes part of your outstanding balance, of which you have to make a minimum payment monthly to keep the credit account in good standing.
Which is more expensive?
Both credit card cash advances and payday loans are costly forms of credit. Receiving an advance from your credit card will set you back between 20-24% p.a. A payday loan of less than $2,000 will cost you an establishment fee that is 20% of the amount you borrow and a 4% monthly fee.
Keep in mind the cash advance rate is an annual rate whereas the payday loan is not.
If you pay the cash advance back quickly it can be cheaper, but if you only make the minimum repayment then you may want to consider a payday loan. This is because your 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
Most payday loans require a minimal amount of criteria needed to be approved. This includes income, age and residency requirements.
- Fast turnaround
You will usually receive an answer instantly or within 5 minutes, and the money within a day or two.
The requirement for these loans is that you pay them back quickly, leaving you with no extra debt to worry about.
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 you are late on a repayment.
- Overall cost
In general, the overall amount of money you will spend for this service makes it a non cost-effective way to handle your finances.
Pros and cons of withdrawing cash with your credit card
There are no additional applications needed with a credit card cash advance. You only need to find an ATM and withdraw the cash you need.
- Concise billing
As the cash advance is part of your credit card billing, you won't have the worry of a new account.
- Flexible repayments
So long as you don't mind the accrued interest, you can pay off a credit card cash advance at your convenience.
- Interest rates
The interest rate charged for a credit card cash advance is considerably higher than what you would pay for your standard personal loan. You'll also accrue interest from the moment you make the cash advance.
- Overall cost
Like the payday loan, the overall cost of the cash advance makes it an option you should think twice about before using.
How to know what to apply for
Even after understanding both products, you still might wonder which one is right for you. Asking yourself the following might help you decide which is the right application to submit:
- Do you have bad credit? If your answer is "yes" and you don't already have a credit card, then you may not be eligible to be approved for another one. Review the eligibility criteria of the products you are interested in before submitting your application, but if you are weighing up your options of a credit card and a payday loan and you have bad credit, you may find you are only eligible for the latter.
- Do you already have a credit card? If you do, check what interest rate you will be charged for taking out the cash advance. Also check how much credit you have left in your account and if it will be sufficient for what you need. You can then use this information (the interest rate) to compare it with your payday loan options and see which one will be more expensive based on when you can repay the money.
- When will you 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 you apply make sure you can afford the repayments set out by the lender. If you aren't sure when you can repay, remember that a credit card cash advance can easily get out of hand if you don't repay it quickly – there is no fixed repayment term and the interest can just keep rolling over costing you a lot of money.
It’s always important to compare your options before applying for a payday loan or taking cash out on your credit card. Many financial experts advise to explore other avenues before applying for a payday loan or withdrawing money on your credit card. Due diligence is a must with both products.