If you already have a credit card, it’s super easy to get a cash advance.
But it can also be super expensive. Before you borrow money from your credit card, make sure you understand how a cash advance works, how you can minimize cash advance fees, and if there are any better alternatives.
How Do Cash Advances Work?
A cash advance is a way to borrow cash from your credit card company. You can initiate your cash advance online, through cash advance checks sent with your credit card statement, or through an ATM.
To take money out of an ATM via a cash advance, you will need the PIN number associated with your credit card. You’ll then have to agree to all the cash advance fees before you can get your money. You might also incur ATM fees.
If you initiate the cash advance online, you can set it up to be directly deposited into your checking account via ACH transfer. You will have to agree to all the cash advance fees before getting your money this way, too.
Another way you might be able to take out a cash advance is with convenience checks that your credit card issuer sends with your statements. These might come with every statement, every few months, or once a year at renewal depending on your credit card issuer. As soon as you sign and hand over the check, you’re agreeing to the terms of the cash advance.
Your cash advance limit is likely to be smaller than the purchase limit for your credit card. Check your documentation or contact your card issuer to find your credit limit for a cash advance.
What Makes Credit Card Cash Advances so Expensive?
Cash advances are an extremely expensive way to borrow — even more expensive than using your credit card to make a purchase. Cash advances come with extra transaction fees, and higher APRs than regular credit card purchases. And that APR starts accruing immediately unlike credit card purchases.
The first expense to take into account is the transaction fee. This fee is usually somewhere between 3% and 5%. Typically, there is a minimum fee that’s somewhere around $10.
Let’s say you took out a $250 credit card cash advance with a transaction fee of 3%, but a minimum transaction fee of $10. Three percent of $250 is $7.50, but that’s less than the minimum fee. So you would be charged a $10 transaction fee — even though it’s more than 3%.
But if you’re taking out a $1,500 cash advance, 3% would be $45. Since 3% is more than the minimum transaction fee of $10, you’d pay $45 in transaction fees.
Credit cards almost always come with a high APR. But each card actually comes with at least two APRS: one for purchases, and then another for cash advances. The cash advance APR is almost always higher.
This is true even if you sign up for a card with a 0% introductory APR. This 0% rate typically applies for a set period — say, 12 months — and it usually only applies to credit card purchases or balance transfers. It usually does not apply to the APR for cash advances.
Interest Starts Accruing Immediately
Not only do credit card cash advances come with a higher APR, but that interest starts accumulating immediately. With credit card purchases, you’ll get a grace period, and won’t pay interest if you pay off your balance in full before your first statement due date after purchase.
Not so with cash advances. There is no grace period. You start owing interest the moment the money comes out of the ATM (or gets transferred to your bank account.) Because interest starts accumulating immediately, it gets much more expensive to pay off much more quickly.
What Is the Average Cost of a Cash Advance?
The cost of your credit card cash advance varies depending on how much you borrow. To make this analysis simple, let’s say you’re borrowing $1,000. The average cash advance fees and interest rates on a cash advance are:
3%-5% transaction fee
On a $1,000 balance, your transaction fee may be anywhere from $30 to $50. With an APR of 24.99%, if you paid off your balance on Day 30, you’d owe somewhere around $20.83 in interest. If it only took one month to pay back the money, the total financing costs would be somewhere between $50.83 and $70.83.
The longer it takes you to pay off the debt, the more expensive it gets. Credit card interest usually compounds daily. This means what seems like a manageable dollar amount of interest at the beginning can spiral out of control quickly.
How to Reduce the Costs of a Cash Advance
A credit card cash advance is an expensive way to borrow, and one that you should avoid if possible. But if you find yourself in a situation where you absolutely need one, there are a couple ways to slow the bleeding. They’re simple concepts, but they may not be easy to implement.
Minimize How Much You Borrow
The fees and interest on your cash advance are a percentage of the amount you borrow. That means one of the best ways to limit your interest and fees is to lessen the amount you borrow.
If you’re borrowing this money to pay for a down payment on a car loan so you have transportation to your place of employment, maybe don’t get the fanciest model vehicle. Get something functional, safe and affordable instead — without all the bells and whistles.
You could also try negotiating with the dealership on the base price, which should lower the amount required for a down payment by the bank.
Anything you can do to lower the amount you borrow via a credit card cash advance is worth considering.
Pay Off Your Cash Advance as Quickly as Possible
Just trying to get enough money together for groceries until payday? Then make sure you pay back your cash advance as soon as your paycheck hits your account.
Because interest compounds daily, every day you owe money will cause your total due to grow noticeably the longer it takes you to pay it off.
Alternatives to Cash Advances
If you need money quickly, there are other products you could consider. Some are better than credit card cash advances – and some are worse.
Personal Loan vs. Cash advance
Personal loans tend to be cheaper than cash advances if you have good credit. Unsecured personal loans require no collateral, and you ideally want to get one with a fixed interest rate for predictable monthly payments.
If you have good to excellent credit, you might expect these loans to come with an APR somewhere between 7% and 20%. If you have poor credit, though, interest rates could be even higher than those found on cash advances.
Personal loans sometimes come with origination fees, too, which are an additional fee but are also already figured into the cost of the APR. If you take out one of these loans, it’s ideal to find one without any prepayment penalties. That way if you pay off the loan early to save money on interest, you won’t incur any extra expenses.
Also be wary of personal loans that come with balloon payments. With these loans, your monthly payment will be lower at first, but then you’ll have one, lump-sum payment at the end. If you can’t afford the balloon payment, you’re right back where you started – needing to borrow more money.
One con of these loans is that they tend to have terms that last at least a year, though you can find some with shorter terms. Another problem is that if you only need to borrow a few hundred dollars, most financial institutions offer a minimum amount between $500 and $1,000. So you might end up borrowing more than you need.
In many cases, a personal loan is preferable to a cash advance. But be mindful that if you have poor credit or the interest rate offered to you is higher than 20%, that might not be the case. Run your own personal numbers carefully.
Payday Loan vs. Cash Advance
The interest rate advertised by payday loan lenders is rarely in terms of APR. If it were, it would often be over 100%.
Different states have different laws regulating exactly how much payday lenders are allowed to charge, but even still, a cash advance will be dramatically cheaper than a payday loan.
Borrowing Money From Family & Friends vs. Cash Advance
If you’re in a rough financial spot, you could always reach out to a family member or friend for help. Depending on your relationship and the amount of money, they may keep the debt informal or write out an official contract with or without interest.
Before you borrow money from family or friends, make sure you can afford to pay them back in the near future. If you cannot, it may damage your relationship. However, if you can find a favorable, realistic arrangement, this method is highly likely to be less expensive than taking out a cash advance.
Ask for Assistance vs. Cash Advance
Taking out a cash advance to cover something like a utility bill? There may be a program available to help you so that you don’t have to borrow from your credit card company.
For utility bills in particular, there are usually two options: payment plans, or charitable assistance programs.
If your utility company sets you up on a payment plan, they may be willing to spread your current balance out over the course of several months, making repayment more achievable than owing it all in one lump sum. They may also set you up on a plan that estimates equal payments over the course of a year, so you’re not paying $20 for heat in July and $300 in January. Instead, you might get a more steady monthly bill of $150 or something along those lines.
If there is a state, government, or charitable program associated with your utility, they may have funds on hand to help people who are going through economic hardship. It may bruise your ego to apply for a program like this, but the amount of interest and principal it saves you can give you a clean slate and help keep the lights on without going into unaffordable debt.
Pittsburgh-based writer Brynne Conroy is the founder of the Femme Frugality blog and the author of “The Feminist Financial Handbook.” She is a regular contributor to The Penny Hoarder.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.