Cash Advance vs. Payday Loan: Everything You Need to Know

If you need money quickly, you might be considering taking out a cash advance or a payday loan. However, both come with high costs and fees, especially if you can’t pay them back right away.

To help you learn about a payday loan and cash advance, this guide will cover:

• how a cash advance vs. payday loan works

• the differences between a cash advance and payday loan

• the benefits and drawbacks of a payday loan vs. cash advance

We’ll also look at some alternative borrowing options you might want to consider instead.

Understanding Cash Advances 

If you have a credit card, you may be eligible for a credit card cash advance. Some cards offer an option that lets borrowers take out cash against their line of credit, which they pay back with interest and fees.

If your credit card offers cash back, you can go to an ATM and input your PIN to access the funds. You may also be able to take out a cash advance at the bank you have the credit card with, or with paper checks provided by your card issuer. Once you take the cash out, interest starts accruing immediately. You’ll also pay a cash advance fee that will either be a flat fee or a percentage of what you borrow.

A cash advance can be helpful when you need cash fast, such as for an emergency or unexpected expense. And if you can repay the money quickly, before accruing too much interest, you might not owe too much in interest and fees. If you can’t, however, a cash advance may be costly since the interest charges and fees add up.

Understanding Payday Loans 

A payday loan is a short-term loan, typically for around $500 or less, that comes with high costs. These loans are generally meant to help you financially until your next paycheck arrives. However, they can be risky. The loan payment will be due very quickly, usually by your next pay period. Payday loans often have extremely high interest and fees — sometimes as high as 400%. If you can’t pay off the loan in time, you could get stuck in a cycle of debt, accumulating more interest and fees.

Payday loans tend to have few requirements. Typically you just need to fill out a short application and provide your ID and payment information, such as your bank account. Payday loans are legal in some states, but not in all. Different states have different regulations regarding payday loans, so check with your state attorney general’s office.

Recommended: Getting Out of Paying Payday Loans: Things to Know

Cash Advance vs. Payday Loan: Loan Amount 

In terms of how much you can borrow with a cash advance vs. payday loan, there are some differences.

^{*Maximum amount varies by state}

The amount you can borrow with a cash advance depends on your credit card limit as well as what your credit card issuer allows in terms of the minimum and maximum amount you can borrow. Check your credit card terms for more information, or ask your issuer.

The amount you can borrow with a payday loan varies by state, since each state has its own rules around payday loans. Generally, the amount you can borrow with a payday loan ranges from about $50 to $1,000.

Cash Advance vs. Payday Loan: Interest Rates 

Both cash advances and payday loans come with high interest rates and fees that can make the cost of borrowing more expensive.

Cash advances have average interest rates around 17.99 to 29.99%. They also come with a fee that may be a flat rate (approximately $5–12) or a percentage of the amount borrowed (typically 3–8%).

With a payday loan, the amount you pay in fees tends to be about $10 to 30 for every $100 you borrow. That could add up to an APR (annual percentage rate) of 391–521% if the loan isn’t paid off quickly.

Cash Advance vs. Payday Loan: Requirements 

When it comes to a payday loan vs. cash advance, there are typically very few requirements to qualify for either. 

To qualify for a cash advance, you need a credit card that offers cash advances. The requirements to get such a credit card vary from one card issuer to another. Your credit score, income, and existing debt may be considered with your application.

To qualify for a payday loan, you must be 18 or older and have an active bank account. You will likely also need to show a valid photo ID.

Cash Advance vs. Payday Loan: Repayment Terms

Knowing the repayment terms for a payday loan and a cash advance is crucial. Generally, the longer you need to pay off either one, the more you’ll owe.

Both a cash advance and payday loan start accruing interest as soon as you borrow the money. With a cash advance, there’s no deadline for repayment, but the longer you take to pay off the balance, the more you’ll owe in interest.

A payday loan is typically due when your next paycheck arrives. If you can’t repay it in that short amount of time, the lender will often extend the deadline through a rollover. But you will be charged additional fees, which can make the loan even harder to pay off.

Avoiding Payday Loans and Cash Advances 

Both payday loans and cash advances come with high fees that may end up being extremely costly. Consider other borrowing options instead, such as these cash advance and payday loan alternatives: 

Credit Cards 

Instead of using your credit card for a cash advance that comes with a fee and starts accruing interest immediately, you could simply charge the expense to your credit card. Credit cards do have high interest rates, which is important to consider if you’re deciding between personal loans vs. credit cards, since personal loans typically have a lower interest rate. If you use a credit card for the expense, try to pay the balance before the billing cycle ends, if possible, to avoid paying interest charges.

Personal Loans

With a personal loan, a bank, online lender, or credit union lends you a lump sum that you repay with interest in installments over time. Personal loans are flexible and may be used for almost any purpose. One of the advantages of personal loans is that once you’re approved, you may expect to receive funds quickly, typically within one to five days. Some lenders even provide same-day funding.

There are a few common personal loan requirements. For instance, lenders will do a credit check. This is part of the origination of a personal loan, and is one of the steps involved in getting a loan. 

The higher your credit score, the lower the interest rate you may get. But there are also personal loans available for those with bad credit. It’s wise to find out what type of interest the loan charges and whether it’s simple interest vs. compound interest. You can shop around and compare personal loan rates to find the best options for you.

The Takeaway 

Payday loans and cash advances both have high interest rates and fees, and they may be difficult to repay quickly. Before taking out either one, weigh the pros and cons very carefully. And consider a personal loan, which may be a more cost-effective way to get the cash you need.

If you’re exploring personal loan options, Lantern can help. With our online tool, you’ll fill out one simple form and then get offers from multiple lenders at once so you can find the most favorable rates and terms.