What is a Cash Advance?
A cash advance is a high interest loan typically taken out on a credit card or a line of credit from a bank. Interest on a cash advance begins accruing immediately upon disbursement.
How Does a Cash Advance Work?
Suppose John uses his credit card to get a $100 cash advance at a bank or an ATM. The credit card company charges a higher interest rate on the cash advance than it would charge Sue on $100 worth of merchandise. Interest on the $100 cash advance begins to accrue as soon as the cash advance is disbursed, and Sue will need to start repaying the advance as part of her next credit card payment.
Some banks also make cash advance loans for a fixed fee and deduct the loan amount from future direct deposits. This type of loan is usually extended to people who are paid through direct deposit and have a predictable income stream. Suppose John gets a $100 cash advance from the bank. The bank could then deduct $100 dollars for the loan and an additional $10 as a fee from his next direct deposit.
Why Does a Cash Advance Matter?
The high interest rate and accrual terms of a cash advance make it an expensive and risky financing option, typically chosen as a last resort. It's always important to read the fine print on any loan. This is especially true for cash advances from credit card companies. Often, credit card companies force the borrower to pay off the entire balance of the credit card before they can begin to pay off the high interest cash advance.