Cash advance loans are short-term lending options designed for individuals facing urgent financial needs. These loans are often referred to as payday loans, guaranteed loans, or no-credit-check loans and are readily available both online and in physical stores. However, they are associated with elevated fees and the risk of becoming trapped in a cycle of debt.
Prior to obtaining a cash advance loan or any similar brief financial assistance, it’s vital to contemplate several key factors.
What Is a Cash Advance Loan?
A cash advance, commonly referred to as a payday loan, is a brief lending arrangement known for its expedited application process and swift disbursement of funds upon approval.
In the typical cash advance transaction, an applicant completes either a paper or online application. Upon approval, the lender disburses the requested amount, deducting specific fees. To access the funds, the borrower may be required to write a check to the lender, covering the borrowed amount along with the associated fee.
On the subsequent payday, the lender will either withdraw the borrowed amount and additional fees from the borrower’s checking account, provided they have been granted authorization to do so, or they will cash the check if one has been issued.
Lenders typically mandate the presentation of proof of an active bank account or prepaid debit card account, as well as verification of income and age (with borrowers typically needing to be at least 18 years old to qualify). State laws and individual lender policies dictate maximum loan amounts, with a standard cap of around $500, though variations exist depending on jurisdiction and specific lender guidelines.
4 Reasons to Be Cautious With Cash Advance Loans
Cash advance loans commonly feature enticing promotions, marketing them as a swift financial solution for unexpected expenses.
However, for the majority of short-term borrowers facing consistent financial deficits and struggling with meeting regular financial obligations, the exorbitant expenses associated with these loans can exacerbate their predicament.
This risk has led to a complete prohibition of payday loans in over a dozen states and Washington, D.C.
There are four additional compelling reasons to exercise caution when considering cash advance loans.
1. They Come With Finance Charges
Cash advance loans impose borrowing fees that often translate to staggering APRs, ranging between 300% to 500%, and sometimes even higher. The true extent of this high interest rate may take time to register when securing a cash advance loan, given that loan costs are typically promoted in terms of a flat dollar amount.
However, upon closer inspection, borrowing $500 with a $75 interest and finance fee for a 14-day term is akin to acquiring a loan with an APR of 391%. To provide perspective, this APR is significantly higher than the national average APR for a standard personal loan with a two-year term, which stands at 9.34%. This stark contrast underscores the exorbitant cost associated with borrowing through a cash advance loan.
2. Expensive Fees Can Trap You in Debt
In addition to the elevated fees, should a borrower be unable to repay the loan promptly, the lender might propose a new loan, accompanied by another fee. This practice often leads borrowers into a cycle of debt refinancing or “rolling over” their loans.
As per a Consumer Financial Protection Bureau report, the average payday or cash advance borrower went through the process of rolling over a loan approximately nine times within a year, accumulating fees amounting to $458, underscoring the financial strain caused by this repetitive borrowing pattern.
3. There’s Likely No Credit Check but Also No Credit-Building
Respected lenders typically assess both your credit history and repayment capacity before granting loan approval. However, cash advance lenders tend to avoid conducting a hard credit inquiry as part of their approval procedure.
Although this may seem attractive, it’s essential to recognize that a cash advance online may not contribute to enhancing your credit score. This is because these lenders generally do not report your payment activity to the three major credit bureaus.
4. You May End up Overdrawn
According to a study conducted by Pew Charitable Trusts, over 25% of payday loan borrowers reported instances where payday lenders made unauthorized withdrawals from their checking accounts, causing overdrafts.
These overdrafts often trigger fees from both the lender and the bank, further exacerbating the cycle of debt for the borrowers.
Bottom line
Cash advance loans disguise themselves as a convenient means to acquire cash quickly, akin to payday loans. However, their costly fees can significantly contribute to ensnaring borrowers within a relentless cycle of debt, presenting formidable challenges for escape.
Loans with high-interest rates and substantial costs, such as cash advances or payday loans, should be a last resort, sought only when all other avenues have been exhausted. Suppose one concludes that a cash advance loan is necessary.
In that case, meticulous budgeting for the ensuing payday to accommodate the owed amount is crucial to evade the pitfalls of the cash-advance cycle.
