Credit card cash advances vs payday loans

If you find yourself short on cash, you may need to borrow money quickly to keep up with your bills or to cover an unexpected emergency. When this happens, you may consider a credit card cash advance or a payday loan. Credit card cash advances and payday loans have at least one thing in common: You can have access to money very quickly. So, before deciding on either loan option, it’s helpful to understand some of the key differences between the two.

By definition: Credit card cash advance vs. payday loan

It’s easy to think that a cash advance and payday loan are the same things, but that’s not the case. We can start to see how they’re different by looking at the definition of each option.

A cash advance is a short term cash loan that you take out through your existing credit card.

A payday loan is a loan that typically comes with few eligibility requirements and a quick turnaround time. Lenders can operate online and/or have physical store locations.

How much can you borrow?

Payday loans can often throw consumers into a vicious cycle of debt, so these types of loans are regulated in most provinces by the government in order to protect borrowers. You’ll often see limits on how much you can borrow through a payday loan – typically $100 to $1,500, depending on the province or territory you reside in and the lender you go with.

The amount you can borrow through a cash advance is generally limited to a percentage of your credit card’s credit limit. Usually, this comes out to a few hundred dollars. Don’t be surprised if your credit card has daily, weekly and monthly cash advance limits in place. It’s very common to see a maximum cash advance limit of less than $500 a day.

• Bottom line: How much you can borrow depends on your credit limit and any regulations in your province. Additionally, your credit score and income may affect the amount you can take out with a payday loan.

What are the repayment terms?

Unlike credit card purchases, a cash advance will typically start accruing interest immediately. In other words there’s no interest grace period, which you usually get when you use your credit card for normal purchases.

Similarly, a payday loan comes with immediate interest. The key difference is the time horizon for repayment. Some lenders require repayment as early as your next payday, while others will be more flexible with the repayment dates. With a cash advance, you can carry debt long-term, if you wish, as no one is expecting the money back on a set date.

• Bottom line: Repayment for a payday loan is due much sooner than for a cash advance.

What are the interest rates?

For a cash advance, you usually need to pay an upfront fee – for example, $10 or 5% of the amount you take out. Then you pay interest on your cash advance, usually around 24% annual percentage rate (APR), however it can be higher or lower.

For a payday loan, you’re charged an upfront fee based on how much you borrow – typically $15 to $25 per $100 you borrow. Since the repayment window of a payday loan is around two weeks, that works out to an APR of about 400% and up.

That creates a distinct difference between cash advances and payday loans. Theoretically, you could take out a cash advance today and pay it back tomorrow, accruing very little interest. But regardless of when you repay a payday loan, you still pay the same amount in finance charges.

• Bottom line: You’ll pay a set amount in interest for a payday loan. For a cash advance, the interest you pay depends on how long you carry your debt.

How much are the fees?

You’ll be charged a fee as soon as you take out a cash advance. You’ll usually find the cash advance fee written in your credit card terms like this: “Either $10 or 5% of the amount of each transaction, whichever is greater.” With a payday loan, you’ll pay a finance charge of around $15 to $25 for every $100 you borrow.

Bottom line: Upfront fees for cash advances are often cheaper than those for payday loans – but remember that you still need to pay interest on a cash advance.

What are the requirements?

To take out a cash advance, you need to be approved for a credit card that allows them. Meanwhile, all you need to obtain a payday loan is a bank account and a valid ID. You will also have to be 18 years of age or the age of majority in your province, as well as a Canadian citizen or permanent resident. Payday loan centers usually don’t run deep credit checks, so payday loans are typically easier to get than cash advances.

• Bottom line: Payday loans usually have fewer eligibility requirements compared to credit cards, although once you have a credit card you don’t need additional approval for a cash advance.

Learn about the provincial/territorial payday loan regulations in Canada

Cautions to keep in mind

Now that you understand the differences between cash advances and payday loans, it’s important to consider the drawbacks of both.

• One drawback is they’re both very expensive loan options. In particular, payday loans are notorious for dragging borrowers into cycles of endless debt. Since payday loans cost so much, borrowers often have to take out additional loans to pay off what they owe.

• Cash advances are pricy too. Not only do you have to pay an upfront fee to get one, but you also immediately start accruing interest on the amount you’re advanced. Additionally, the APR will likely be substantially higher than your credit card’s purchase APR.

Most people take out cash advances and payday loans when they are in troublesome financial situations – but they often find themselves in deeper debt afterward. We recommend turning to a cash advance or payday loan only in a true financial emergency.

Bottom line

If you’ve decided that a cash advance or a payday loan is the route you’d like to take to solve your immediate need for cash, your ultimate choice between the two will depend on several factors. These factors include:

1. The amount you want to borrow.
2. How soon you’re able to pay the money back.

You can also check out our guide on payday loans to learn more about payday loans and further compare your options.

Frequently asked questions

• What are some alternatives to taking out a cash advance or a payday loan?

  A few options include asking friends or family for a loan, getting a personal loan, using debt consolidation and taking on quick jobs to collect extra cash. For more alternatives, read our article on avoiding payday loans

• How do cash advance fees work?

  You’ll usually pay a flat rate or a percentage rate, whichever is greater. For example, the cash advance fee in your credit card terms may be written as: “Either $10 or 5% of the amount of each transaction, whichever is greater.” According to those terms:

  • If you’re taking out a $100 cash advance, you’ll pay a $10 fee. (It’s greater than 5% of $100, which is $5.)
  • But if you’re taking out a $500 cash advance, you’ll pay a 5% fee – this comes out to $25.

  In addition to the fees, you’ll immediately accrue interest on your cash advance.

• How can I avoid having to take out a cash advance or payday loan in the future?

  It’s a great idea to look for credit counselling or seek financial advice. A reputable counsellor can help you solve the structural issues that led to your financial difficulties in the first place, such as overspending or forgetting to pay your credit card bills. Read our guide on where to get free help to manage debt here for more information.

• Are credit card cash advances bad for my credit score?

  A credit card cash advance generally won’t impact your credit score, unless you can’t afford to pay it back and consequently miss a payment. Your credit score might also be negatively impacted if the amount of your credit card cash advance raises your balance owing to above the recommended 30% of your credit limit – a concept that’s also called increasing your credit utilization ratio.

Written by

Kevin Joey Chen

Writer

Kevin Chen is a personal finance expert and a former writer at Finder. His expertise has been featured in CNN, U.S. News and World Report, Lifehacker and CreditCards.com, among other top media. See full bio