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Cash advance vs personal loan

cash advance vs personal loan

The main difference between a cash advance and a personal loan is that a cash advance offers a small amount of funds upfront and is usually repaid in a single payment. While a personal loan may provide more money and is usually repaid in installments. 

When looking for funding, you will likely come across a few different options, including cash advances and personal loans. Both of these loan options can be helpful for emergency situations; however, they have important differences you need to consider! Continue reading to learn more about these different loan options to figure out if they are the right fit for your needs.

How Exactly Does a Cash Advance Work?

A cash advance can be considered any kind of loan which makes cash available for borrowers. In general, cash advances make a few hundred dollars available and must be repaid in a short period of time. 

These types of cash loans are usually enticing for bad credit borrowers who may not be eligible for standard credit options. Although convenient and flexible, cash advances usually have a higher cost than other loans. Despite this, the cash advance industry is expected to grow in 2023.1 Here are some examples of cash advance loans

Credit Card Cash Advances

Many credit cards allow users to withdraw cash from their credit limit, called a credit card cash advance. Credit card cash advances can definitely be a convenient option if you already have a credit card you can use, as you won’t have to go through a whole new application. However, there are a few drawbacks to consider. 

With credit card cash advances are usually limits to how much you can withdraw, and the fees for credit card cashbacks will be higher than credit card transactions. You’ll also have to repay the funds fairly quickly.  

Payday Loans

A payday loan can be considered a cash advance loan. These loans provide a small amount of funds, which will need to be repaid in about two weeks, the average time period that most people get paid. Payday loans are extremely fast, same-day funding is often an option, and in some cases, there may not be a credit check with the process at all. On top of that, these loans provide flexibility for bad credit borrowers. However, getting a payday loan is usually not a good idea. 

These loans come with extremely high-interest rates and costs, and because of that, payday loan debt can quickly lead to a cycle of debt. And so, although these are an available cash advance option, you should try to avoid payday lenders if you can. 

Standard Cash Advance Loans

These are the most straightforward and likely the most common options you will find when you search for cash advances online. With these, you’ll borrow cash through a lender or financial institution and then repay them back, usually in a single monthly payment or sometimes in installments. 

A Cash Loan From Friends and Family

You may not really think about this option as a cash advance, but a cash loan from friends or family can be considered a cash advance. The flexible thing about this is that there likely won’t be interest, and repayment will be flexible. However, not everyone has this option, and some people who do may not be comfortable enough to pursue it, as asking for help can be awkward. 

Merchant Cash Advances

A merchant cash advance is for business owners, where a merchant gives a business owner a certain amount of cash upfront, which the business has to repay at a future date. This can be a great way for small businesses to get the funds they need to start or grow their businesses. 

The Process of Getting a Cash Advance Loan

Depending on the type of cash advance you are getting, the process may be a little different spending the loan type you are looking into, but in general, you can expect the process to look similar to this: 

Find Lenders and Loans You Want To Borrow Money From

Your first step should be to figure out what kind of cash advance is best for you. And then find a handful of lenders you want to work with. You can find a cash advance loan through a private lender (online or in person), a credit union, or a bank.

Apply for Pre-Approval With a Lender

The next step is to apply for pre-approval with lenders; once you go through that, you’ll know about the loan amount and the average loan terms you’ll get. With cash advance loan options, most lenders will ask about your income, sometimes your credit score with all three credit bureaus, and existing debt. 

Compare Loan Options

Once you have pre-approval, you can figure out what cash advance loan option is best for you by comparing loan amount, APR, repayment options, and the lender themselves. 

Move Forward With Final Approval and Get Your Cash

If you want to move forward with a loan, you’ll have to finish the application process. From here, you will likely have to send in some documentation to prove things like your income and identity. With final approval, all that is left to do is review the loan terms and take out the loan. You’ll get your funds in cash and will be able to use them right away. 

Details on a Personal Loan

A personal loan is one of the most versatile loan options available. They can come in large and small amounts, varying interest rates, repayment terms, and various uses. Versatility is one reason why these loans are some of the most popular lending options out there; however, that isn’t the only reason that people seek out these loans. Because there are so many different personal loan options out there, having bad credit can be okay with a personal loan. 

Applying for a personal loan is pretty similar to a cash advance loan application process. However, because personal loans can be for higher amounts, the final decision process can take a little longer. Another variable in which cash advances and personal loans have in common is where you can find them, with banks, credit unions, and private lenders

There are a few major differences between personal loans and cash advance loan options personal loans tend to be more affordable; for example, personal loan interest rates are usually more competitive than something you would find with a payday lender. 

Personal loans are also more flexible with repayment, you may get more time to repay your personal loan. They also usually make more funds available than a cash advance loan option. And the last major difference is that you can get a secured personal loan, one which includes collateral

Not sure what personal loans can be used for? Here are some examples of personal loan uses: 

Medical Bills

Medical bills can occur for anyone, and sometimes, paying out of pocket may not be an option. A personal loan can help pay those medical bills off and repay the loan in steady monthly payments. 

Home Repair and Improvement

Homeowners can use a personal loan for all kinds of home renovations and improvements. 

Business Expenses

Although most people use business loans for their business-related expenses, personal loans can work, too. You can use a personal loan to start or grow a business. 

Car Repairs

If you own a vehicle, you know that some car repairs can show up out of nowhere, especially if it is something like a car accident. A personal loan can help take care of those car repair costs, or help with maintenance such as new tires or new car parts. 

Rent and Mortgage Payments

For most people, their rent or mortgage payment is likely the largest bill they have each month, which means if finances change, then that will be the most challenging payment to make. A personal loan can help alleviate that burden so you can take care of other expenses as you get back on your feet.

Utility Bills

Utilities are another important bill that everyone has to pay. Borrowing money through a personal loan can help pay those utility bills.

Credit Card or Debt Payments 

Whether you owe a credit card issuer or a loan lender, you can use a personal loan to refinance or consolidate debt. Or you can use a personal loan just to make your monthly payments on debt if you need to pay your bills for the month. 

Which Option Is the Right One for Me?

Here are some things to consider when choosing between a personal loan and a cash advance: 

CriteriaPersonal LoanCash Advance
Interest Rates and FeesUsually lower than cash advances.Higher rates and fees.
Processing SpeedMay take longer to process.Faster processing.
Suitability for Large ExpensesSuitable for large expenses.Not ideal for large expenses; consider personal loan.
Multiple Loans for Single ExpenseCan take out a single loan for an expense.Not advisable to take multiple cash advances.
Credit Score ConsiderationMay work for borrowers with bad credit.May also work for borrowers with bad credit.
Quick Cash NeedsTakes time for processing (online lenders may be able to offer same-day funding).Provides quick access to cash.
Repayment StructureFixed monthly payments.Varies; often shorter-term with lump-sum repayment.

FAQS

What are the main differences between payday loans and personal loans?

Payday loans are short-term, high-interest loans typically due on your next payday, while personal loans are longer-term loans with lower interest rates and fixed monthly payments. Payday loans are often used for immediate cash needs, whereas personal loans can cover larger expenses.

How do payday lenders differ from banks and credit unions in offering loans?

Payday lenders offer short-term loans with high fees and interest rates, often without a credit check. Banks and credit unions, on the other hand, offer a variety of loan products, including personal loans, usually with lower interest rates and longer repayment terms, often requiring a credit check and assessment of your bank account and financial history.

Can taking a payday loan affect my credit score reported to credit bureaus?

Yes, taking a payday loan can affect your credit score. Some payday lenders report to credit bureaus, and failure to repay the loan on time can negatively impact your credit score. Conversely, timely repayment may have a positive effect.

What are the advantages of a credit union personal loan over a payday loan?

Credit union personal loans typically offer lower interest rates and more favorable terms than payday loans. They also offer a more personalized service and are often more willing to work with borrowers who have less-than-perfect credit.

Is it advisable to use a credit card cash advance instead of a payday loan?

It depends on your financial situation. A credit card cash advance might have lower interest rates compared to a payday loan and doesn’t require repayment by the next payday. However, cash advances still carry higher interest rates and fees than regular credit card purchases.

How does a payday loan impact my ability to get a personal loan from a bank or credit union?

Having an outstanding payday loan or a history of payday loans can affect your eligibility for a personal loan from a bank or credit union. Lenders may view payday loan usage as a sign of financial distress and may be cautious in offering a personal loan.

What should I consider before transferring payday loan debt to a personal loan?

Before transferring payday loan debt to a personal loan, consider the interest rates, fees, and repayment terms of the personal loan. Ensure that the personal loan offers a more manageable and cost-effective way to clear your debt. Also, consider the impact on your credit score and your ability to manage the consolidated debt.

Key Takeaways With CreditNinja

Cash advances and personal loans are both borrowing options that many consumers have access to. When deciding between a cash advance and a personal loan, make sure to know about the pros and cons of each option. That’s why CreditNinja created this article to help you figure out those qualities. To learn more about different loan options, check out CreditNinja’s blogs. 

References:

  1. Cash Advance Market Size In 2023: Share, Trends, Opportunities Analysis Forecast Report By 2030 | LinkedIn
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