Monday, April 16, 2007

Cash Advance Options - devil's advocate post

Why would someone need a cash advance? Well first possible that someone has an emergency come up which requires more money than a person has cash on hand for. Say a person is unable to pay the rent because they were expecting a paycheck but it was late or not processed.

Where would they get a cash advance? There are two options, either a cash advance on a credit card or a payday loan. Neither option while ideal, sometimes are required for those who are in trouble financially. Which option is better? I’m not sure but I’m going to investigate the matter. I do not promote cash advances, but I do understand that there are people who utilize them. Perhaps they need to examine their spending habits if they are utilizing cash advances, because they are likely living beyond their means. However this post is to examine the options of cash advances.

First a cash advance on a credit card is only possible if you have a credit card. People who need cash advances might already have maxed out credit cards, no credit cards due to poor credit, or are here illegally and thus unable to obtain a credit card. Thus for this subset of people they would be unable to obtain a cash advance from a credit card.

However if someone did have a credit card, say a Citibank general CC, they could insert the CC into an ATM and take out a cash advance. However the caveat is that there is only a limited amount of money which can be advanced either by the credit card or the ATM. What are the fees involved with using this method? First the ATM company will likely charge you a fee for using their machine. Second the CC company will charge a fee for each cash advance, usually a minimum of $5 or 3% of the cash advanced. Third, the CC company often charges and interest rate of 20-25% for the money advanced instead of the typical 10% interest charged for purchases. This interest begins accruing immediately unlike a normal CC purchase which typically has a 30 day grace period. Another caveat is that if you have charges on this credit card, any payment you make will be applied first to the purchases, then to the cash advance. This means that if you do not pay it off in full, the cash advance will be continually accruing interest at a much higher rate than normal and without a grace period.

Now the second option for a cash advance is a payday loan. Payday loans are where borrowers go to a lender say National Payday and apply for a cash loan due in full with your next paycheck. These loans typically require a fee for every $100 borrowed, similar to the CC company. But typically the borrower will leave a post-dated check for the amount borrowed plus fee with the lender who will then collect the money. The fees for this type of lending ranges from 10-15% for the two week period of the loan. Thus, you pay the fee up-front unlike a CC cash advance and know how much interest you are dealing with. For example you might write a $500 check but only get back $400 cash and that would be a payday loan. Often times people who do payday loans keep going back for more because their need for more cash enters into a vicious cycle.

I personally think a payday loan is a better option than a CC cash advance. Solely because CC cash advances accrue interest immediately and are paid last when you pay your CC bill. Thus unless you have a CC with zero charges and only use it for a cash advance, the payments you make will otherwise be to your current charges. Thus it could take a long time to pay off a cash advance. However payday loans are supposed to be a one time cash advance using your paycheck. And the borrower will know exactly what percent interest they are paying on borrowing say $400. There is no possibility for extra interest.

However, I think if you are using either a CC cash advance or payday loan you are in serious financial trouble. There is no easy way out. A person needs to sit down and really examine their financial circumstances and determine how much money they really are spending and if there is a possibility of them not using a cash advance. It could take selling things, getting a second job, or just spending cash instead of using a debit or CC. Whatever it is, a person who is depending on cash advances to survive is quickly circling the drain of being financially fit.


Never Again Debt said...

Are you kidding me? Do you know how dangerous a payday loan is? Do you have any idea how many problems people can get themselves into by taking out a payday loan? Interest rates can go as high as 350%!!!!!

Please retrack your advice. The payday companies know you can't pay them back in 2 weeks and they just keep sucking you in. Military people are their new victims. The US Government is trying to stop these companies from 'feeding' around army bases.

Better to take an advance against your charge card. If you can't pay it back, your problems are limited. There have been cases of people borrowing just $300 from payday and owing $1500 in fees and interest. No credit card, then borrow from a relative, friend, stranger, start selling stuff on eBay, pawn shops etc. DO NOT EVER USE A PAYDAY SERVICE!

Earl said...

I concur-bad advise. If you did the math correctly, paying 500 dollars for a 400 dollar loan is 25% interest in a 2 week span. You can figure out what APR rate you're paying...

Living Almost Large said...

Very high APR. I happen to believe that most people doing a payday loan probably have maxed out CC, late on payments, etc. I don't think they are at all financially responsible. BUT that's not the point of the article.

I actually think that a payday loan is a better option than to keep pulling cash out of a CC. If it's a one time deal.

Now never again debt, I don't do debt but you have. SO shouldn't you be more understanding that you may have to hit rock bottom before improvement occurs? And change only occurs IF a person wants it to? Is it really realistic that people using CC cash advances or payday loans are at all financially savvy?

No way. But if it were me, I'd prefer to take the payday loan hit one time to get back on track and perhaps try buy time to sell stuff, get a second job, etc. So where on this blog do I tell people to go out and spend more than they make? No way.

But people are already there. And using a payday loan or cash advance is probably rock bottom. At least that's my perspective of it. And nope I'm not retracking my advice.

I think people should do a one time check to get back and move forward. And stop spending money they don't have. But the reality is will they?

Never Again Debt said...

Here is the link to the FTC warning regarding payday loans:

Interest on these loans within the first few weeks can go as high as 391%. As a recovering debtor, I know the horrors of debt and what it can do to a person's life. I have never taken out a payday loan, but understand the damage it can do. Therefore, I strongly urge a person in dire financial straights NOT to seek this sort of financing. It is the nails in the coffin.

There are other alternatives, as the article suggests, to get yourself out of harm's way. If I can save just one person from a horrific downfall, then my job is done.

Never Again Debt said...

in case the above FTC link doesn't work, here it is again.

Living Almost Large said...

I wonder though do people who do payday loans even have CC available not maxed out? There is a point where it's not even an option. I've read on financial boards about people who are so behind the car is being repossed, the utilities are out, they are broke. They have spent everything I don't know how but that have. They have maxed out all CC, no more borrowing from friends or family, nothing. They can't get a loan at a bank because they have bad credit.

They don't seem to be doing very well. And if you read Liz Weston's article banks charge the same fees for overdrafts and bounced checks as payday loans, triple digit APR. I don't know if payday loans are as bad as it seems.

Thanks for the article, but I would think that anyone going to a payday doesn't have an alternative. I don't think they can even take $200 out from the CC. And I don't know many companies willing to give money up front.

So I'm standing by my devil's advocates post. I think it's the last stand for people who are pretty much BK. Do I think it's right? No, but I do understand that you have to hit rock bottom before you get it sometimes. I don't know how and why, but some times people dig themselves into holes they can't get out or choose not to get out of.

Irene M. said...

Of course, NO ONE wants to have payday loans, cash advances, small business cash advances, or anything similar, but considering the alternaive for most is bankruptcy and losing everything and closing their business' doors forever, I'm going to have to stand on your side and say that yes, cash advance places are helpful. The business owners/individuals usually know what they are getting themselves into; its not like they're being scammed!

Anonymous said...

Sometimes people do not think of the simple things which are rent, electric, water and groceries. Expenses will always fluctuate and
>payday loans
are necessary in order for you not to get into a bigger debt.

payday loan said...

The charges on a payday loan can add up, if someone doesn's pay on time. Other than that, payday loans are a good option for someone that doesn't want to get caught up with credit cards debts. They can also help in a tight situation, its quick, and most places are open longer hours than banks.