A cash advance may seem like an easy way to get cash fast, but it can cost you a lot of money in interest and fees. Before you take out a cash advance, familiarize yourself with the terms, so you're not hit with an unpleasant surprise. And better yet, avoid a cash advance altogether.
Below, CNBC Select reviews the basics of a cash advance: what it is, the terms and fees, as well as better alternatives for getting cash quickly.
How a cash advance works
A cash advance is basically a short-term loan offered by your credit card issuer. When you take out a cash advance, you're borrowing money against your card's line of credit. You can typically get a cash advance in a few different ways:
- At an ATM: If you have a PIN for your credit card, you can go to an ATM and get a cash advance. If you don't have a PIN, you can request one from your card issuer. Note that it may take a few business days to receive a PIN, and there are often limits to the amount of cash you can withdraw from an ATM.
- In person: Visit your bank and request a cash advance with your credit card.
- Convenience check: Your credit card may have come with convenience checks, which can be used to write a check to yourself. You can then cash it or deposit it.
Cash advance terms and fees
Cash advances are an easy way to get cash fast, but they often come with hefty fees that outweigh any benefits. Before you take out a cash advance, review the terms so you're aware of the high charges you'll likely incur.
- Cash advance APR: Cash advances carry a separate, and often higher, interest rate than purchases or balance transfers. For example, the Citi Double Cash® Card has a 0% intro APR on balance transfers for 18 months. After that, the variable APR will be 19.24% - 29.24%, but a 29.99% variable APR for cash advances. (see rates and fees.)
- Cash advance fee: Your card issuer often charges a cash advance fee, which is typically 3% or 5% of the total amount of each cash advance you request. For example, a $250 cash advance with a 5% fee will cost you $12.50.
- ATM or bank fee: If you use an ATM or visit a bank, you can expect a fee for taking out a cash advance.
- No grace period: Cash advances don't benefit from a grace period. That means you will be charged interest starting from the date you withdraw a cash advance. That's different from when you make a purchase with you card, and the issuer offers a grace period of at least 21 days where you won't incur interest if your balance is paid in full by the due date.
- Separate credit limit: Cash advances often have a separate credit limit that's a portion of your overall credit limit. You may only be able to take out a few hundred dollars.
The cost of a cash advance
Cash advances have numerous terms and fees, as mentioned above, but you may wonder how much the whole thing may cost. Here's an example:
How much a $500 cash advance can cost
| Terms | Cost |
|---|---|
| Cash advance withdrawal | $500 |
| Monthly payment | $50 |
| Cash advance fee (5%) | $25 |
| Cash advance APR (26.74%) | $72 in interest |
| ATM fee | $2.50 |
| Estimated time to pay off the cash advance | 12 months |
| Total interest and fees | $99.50 |
You wind up paying $99.50 in interest and fees if you took out a $500 cash advance and only paid $50 a month.
Alternatives to cash advances
Taking out a cash advance may seem like a good idea in the moment, but it can quickly lead you to rack up debt. We recommend avoiding a cash advance altogether and opting for some alternative options that have better terms.
- Borrow from family or friends: You can ask family or friends for a loan. While it can be uncomfortable to ask, this can be the most cost-effective way to get the cash you need. Make sure you create a repayment plan to keep your relationship on good terms.
- Take out a personal loan: Personal loans usually offer better terms than a cash advance, and you can have access to more cash if you have good credit. With a personal loan, you usually can pay back the loan at a fixed interest rate that's much lower than the APR charged by credit card issuers.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
Cash advances might seem like a quick fix for cash shortages, but they often come with hefty fees and high-interest rates that can lead to significant costs. Allow me to dive into the specifics mentioned in the article.
How Cash Advances Work:
Cash advances are essentially short-term loans offered by credit card issuers. These allow you to borrow money against your card's line of credit through various methods:
- ATM Withdrawal: With a PIN, you can withdraw cash from an ATM using your credit card. If you lack a PIN, you'll need to request one from your card issuer.
- In-Person: Visiting your bank allows you to request a cash advance using your credit card.
- Convenience Checks: Some credit cards come with convenience checks that you can use to write a check to yourself and cash or deposit it.
Terms and Fees Involved:
Cash advances entail several fees and terms to consider:
- Cash Advance APR: This rate tends to be higher than the APR for purchases or balance transfers, resulting in higher interest charges.
- Cash Advance Fee: Card issuers typically charge a percentage of the total cash advance amount as a fee.
- ATM or Bank Fee: Using an ATM or visiting a bank for a cash advance incurs additional fees.
- No Grace Period: Unlike purchases, cash advances start accruing interest from the withdrawal date, without a grace period.
- Separate Credit Limit: Cash advances often have a separate, smaller credit limit than your overall credit limit.
Cost Example of a Cash Advance:
To illustrate the expenses, consider a $500 cash advance:
- Withdrawal Amount: $500
- Monthly Payment: $50
- Cash Advance Fee (5%): $25
- Cash Advance APR (26.74%): $72 in interest
- ATM Fee: $2.50
- Estimated Payoff Time: 12 months
- Total Interest and Fees: $99.50
Alternatives to Cash Advances:
Avoiding cash advances is advisable due to their high costs. Consider these alternatives:
- Borrow from Family or Friends: While potentially uncomfortable, it's a cost-effective way to obtain needed cash. Establish a repayment plan to maintain relationships.
- Personal Loans: These often offer better terms than cash advances and provide access to more cash, especially with good credit. The fixed interest rates tend to be lower than credit card APRs.
Understanding the drawbacks and costs associated with cash advances can help individuals make informed financial decisions and explore more financially viable options to meet their cash needs.
