Four reasons to be cautious when applying for cash advance loans

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A cash advance loan is a quick way to solve a financial crisis. But this loan can lead you into debt.

Short-term loans such as cash advance loans are available to people in need of immediate cash. You can also call them guaranteed loans, payday loans, or no-credit-check loans. There are plenty of them available online and in stores.

Cash advance loans are often expensive and can lead to debt traps.

Here are some things you should consider before taking out a short-term cash loan.

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What’s a cash advance loan? 

A payday loan or cash advance is a short-term loan. It typically offers quick approval and quick money.

The typical process is: If approved, you will receive the amount of the loan (minus any fees) from the lender. To get the funds, you will need to send a check to the lender detailing the amount you wish to borrow and the fees. The lender will debit your checking account with the amount borrowed, plus any additional fees if you have authorized it to do so. If you have written a check, the lender will cash it.

Lenders will often ask for proof of income, proof of a bank account or prepaid card account, and proof that you are at least 18 years old to borrow. Lenders can limit the number of loans that are allowed by state law. It’s not common for lenders to allow more than $500. However, some lenders may allow higher or lower amounts.

Four reasons to be cautious when applying for cash advance loans 

Cash advance loans are advertised as fast cash that can be used for unexpected bills. If you are like many short-term borrowers and have trouble paying your bills or dealing with cash shortages, the high cost of a cash advance loan could make matters worse. Payday loans are prohibited in 14 states as well as Washington D.C. because of this risk.

These are just four reasons to avoid cash advance loans.

  1. These are subject to finance charges. 

The APRs for cash advance loans can range from 300% to 500%. But these rates can be much higher. Because loan costs are usually advertised as flat dollars, you may not be aware that the interest rate on cash advance loans can be so high. Take a closer look at this: Borrowing $500 with a $75 finance fee and an interest rate of 39% would equal a loan with an APR of 391%. This is the APR for a standard personal loan of $2,500 with a 2-year term at 9.34%. It will give you an idea of how costly borrowing cash advance loans are.

  1. You could be trapped in debt by paying high fees. 

In addition to the high fees, the lender might offer you a loan with a higher fee if you fail to repay the loan on the due date. Many borrowers are end-up refinancing or rolling over their debt. According to a Consumer Financial Protection Bureau study, the average payday loan or cash advance borrower had nine rollovers in a 12-month period. They also paid $458 in fees.

  1. It’s unlikely that there will be a credit check, but credit-building is possible. 

Before you are approved for financing, reputable lenders will usually check your credit score and ability to repay the loan. Cash advance lenders don’t usually conduct a hard credit check during the approval process. While this may sound appealing, it is important to remember that cash advances don’t always improve credit scores. Most lenders won’t report your payments directly to the major credit bureaus.

  1. It is possible to go overdrawn. 

According to a Pew Charitable Trusts study, more than 25% of payday loan borrowers reported that their payday lenders had overdrawn their checking accounts. Overdrafts can lead to fees from the lender as well as the bank. This contributes further to the debt cycle.

Alternatives for cash advance loans 

A cash advance loan may be your only option if you are facing financial problems and don’t know what to do if you need quick money.

There are other options that might be better for your needs. These are just a few.

  • These low-interest loans are available at most federal credit unions and come with many consumer protections. According to the National Credit Union Administration guidelines for small-sized loans, application fees cannot exceed $20 and can’t be transferred into another loan. Terms range from one month to twelve months.
  • Credit card cash advances A credit card cash advance allows you to take cash against your credit line. They are more expensive than cash advances loans, but they can be repaid quickly and without any fees.
  • Credit counseling: Find a non-profit credit counselor who can help you understand your options and create a long-term financial plan to address any cash flow or debt issues.

Bottom line 

Cash advance loans are payday loans disguised as cash loans. However, they can trap borrowers in a vicious cycle of debt.

Payday loans and cash advances are high-interest loans with high costs. They should be used only as an option when all other options have been exhausted. If you do decide to apply for a cash advance loan, make sure you budget the amount you will owe in order to avoid falling into the cash-advance trap.