Cash Advance vs. Payday Loan

Cash advances and payday loans are two convenient, though potentially expensive, ways to borrow when you need money. You may get a cash advance from a credit card or through a cash advance app. Payday loans, meanwhile, allow you to get an advance against your next paycheck. 

Before taking on either type of debt, it’s important to understand the costs and repayment terms. We’ll guide you through comparing a cash advance vs. a payday loan so you can decide which one makes sense for you. 

Cash advance vs. payday loan at a glance 

Cash advances and payday loans serve the same purpose: putting cash in your hands when you need it. You can see the main differences in the table below.

	Cash advance	Payday loan
Rates	Up to 29.99% for credit card cash advances; apps may charge 0% interest	Effective APRs may approach 400%
Loan amounts	$100 – $1,500 for cash advance apps; higher limits may apply for credit card cash advances	$500 or less, though some states may allow higher limits
Funding time	Virtually instant	Virtually instant
Repayment terms	By your next payday for cash advance apps; no set deadline for credit card cash advances	By your next payday
Fees	3% – 5% credit card cash advance fee; cash advance app fees vary	$10 – $30 for every $100 borrowed is typical

We’ll cover the differences in how each type of loan works in more detail. 

How does a cash advance work?

A cash advance is a type of short-term loan you can get from a credit card or a cash advance app. Credit card cash advances allow you to access a portion of your credit limit, while cash advance apps spot you a certain amount you typically repay on your next payday. 

Many credit card cash advances charge a fee as well as interest. For example, you might pay a 3% fee and a 27.99% interest rate on the cash advance portion of your card balance. Here’s how the cost might add up on a $5,000 advance, assuming it takes you six months to pay it off.

• Cash advance fee: $150
• Total interest paid: $416

This assumes you can manage the $902 monthly payment you’d need to make to hit your payoff goal. If it were to take 12 months to pay off the balance instead, your cash advance would cost you $790 in interest. Unlike purchases, credit card cash advances start accruing interest immediately.

Cash advance apps may charge no fees or interest, but the trade-off is smaller loan amounts. For example, instead of $5,000, you might be limited to borrowing $500. The payoff time frame is much shorter because you’re often expected to pay the advance off by your next payday. 

Pros and cons of cash advances

Cash advances have advantages and disadvantages, like any other type of loan. Here’s how they compare. 

Pros

• Fast access to funds

• Borrow money with no credit check

• No collateral required

• Interest-free and fee-free loans may be available

• Credit card cash advances allow for flexible repayment

Cons

• Credit card cash advances often require a fee, which adds to your cost of borrowing

• Interest rates for a credit card cash advance can be higher than purchase rates

• Interest begins accruing immediately on credit card cash advances

• Cash advance apps can have lower borrowing limits

Our expert’s advice if you frequently use cash advances or payday loans

Erin Kinkade

CFP®

First, consider the purpose of the frequent use—are you using advances for needs or wants? How long do you expect to use this lending strategy if it’s for a need? If it’s for wants, I suggest reconsidering the loan by delaying the purchase until you can make the purchase without a loan. You can do this by laying out a spending plan based on income—aka a budget. In both situations, using the loans for wants and needs, I would suggest coming up with a monthly estimate of the fees you’re incurring and would recommend engaging with a debt counselor or financial counselor to help you avoid or reduce the use of cash advance loans.

How does a payday loan work? 

A payday loan is also a type of short-term loan that allows you to borrow money against your future paychecks. Payday lenders offer payday loans, which can operate online or have physical locations. State laws regulate payday lending, including:

• How much you can borrow
• Interest rates
• Fees
• Repayment terms

In most cases, you agree to repay the loan when you get your next paycheck. Lenders may allow you to renew your loan if permitted by law, meaning you pay a renewal fee and extend your loan repayment date. 

For example, say you borrow $500 and agree to repay the loan plus a $50 fee in two weeks. When the two-week mark comes, you renew the loan and pay only the fee, leaving the $500 original balance outstanding. You’d have another two weeks to repay the principal.

The $50 fee translates to an effective interest rate of 261%, almost 10 times the cash advance cost from the previous example. Renewing the loan can result in paying a sizable fee amount without reducing the balance owed. It can also trap you in a cycle of debt because the loan balance never goes down. 

Pros and cons of payday loans

Payday loans are often labeled predatory due to the high effective interest rates borrowers may pay. However, in some situations, they could be a suitable borrowing option. Here’s how the pros and cons compare. 

Pros

• Access small amounts of cash quickly with no credit check

• Bad credit or nonexistent credit is not a barrier to borrowing

• In most cases, you just need a bank account and a steady job to qualify, as long as you’re 18 or older

• No collateral is required

Cons

• Effective interest rates can be much higher than other loans or lines of credit

• Won’t help you build credit

• It’s easy to get caught in a debt cycle if you renew your loan instead of paying it off

• Payments may be auto-drafted from your bank account, which could lead to overdraft fees

Cash advance vs. payday loan: Which one should I choose? 

Is a cash advance or payday loan better? It depends on your situation and needs. It’s best to choose the borrowing option, which you can most easily repay and will cost you the least amount of money in interest and fees. 

As you’re considering a cash advance or payday loan, here are helpful questions to ask.

• How much do you need to borrow? 
• Can you borrow that amount with a credit card cash advance or cash advance app? 
• How soon can you repay a cash advance or payday loan? 
• What is the maximum interest rate you’re comfortable paying? 
• How much would you pay in fees for a cash advance vs. payday loan? 
• Do you want a short-term loan to help you build credit as you repay it?

Your answers can guide your decision-making. If you’re still on the fence, here are example scenarios that can help you choose between a cash advance vs. a payday loan. 

If…	Consider…
You already have a credit card with a sizable cash advance limit	Credit card cash advance
You need to borrow a larger amount of money to cover an emergency expense	Credit card cash advance
You’ve calculated the interest and fees and are confident you can repay the loan quickly	Credit card cash advance or cash advance app
You don’t have a credit card and are unlikely to qualify for one based on your credit history	A payday loan or cash advance app
You only need a small amount of money to fill a one-time budget gap	A payday loan or cash advance app

Check out our list of the best cash advance apps to borrow money.

Alternatives to cash advances and payday loans

Many people consider alternatives to cash advances and payday loans due to the high costs and potential for falling into a cycle of debt associated with these methods. Both options often come with high interest rates and fees, making them expensive ways to borrow money. 

Payday loans, in particular, can lead to a cycle where borrowers need to take out new loans to pay off old ones, creating a debt trap that is hard to escape. Seeking more sustainable and affordable alternatives is often a wiser financial decision.

Personal loans

Personal loans from banks, credit unions, or online lenders typically offer lower interest rates than payday loans and cash advances. These loans also come with more manageable repayment terms, making it easier for borrowers to pay off their debt without falling into a cycle of borrowing.

Borrow from friends or family

Borrowing money from friends or family can be a more affordable and flexible option. These loans often come with little to no interest and more lenient repayment terms. However, it is important to approach this option with clear terms to avoid potential conflicts.

Payday alternative loans (PALs)

Credit unions often offer payday alternative loans (PALs), which are designed to be safer and more affordable than traditional payday loans. PALs have lower interest rates and more manageable repayment terms, making them a better option for short-term borrowing.

Employer salary advances

Some employers offer salary advances to their employees, allowing them to access a portion of their paycheck before the regular payday. These advances are often free of interest and fees, making them a cost-effective alternative.

Side gigs or freelancing

Taking on a side gig or freelancing can provide an additional source of income, helping to cover unexpected expenses without borrowing money. This option avoids debt and can help improve one’s financial situation over time.

Community assistance programs

Local community organizations and charities often offer assistance to individuals in financial distress. These programs can provide help with essential expenses such as utilities, rent, and groceries, reducing the need for high-cost borrowing options.

FAQ

Is a cash advance the same as a payday loan?

No, a cash advance and a payday loan are not the same. A cash advance is typically a short-term loan you get from your credit card, allowing you to withdraw cash up to a certain limit. In contrast, a payday loan is a small, short-term loan that is usually due on your next payday, often obtained from a payday lender.

Are cash advances a good way to borrow money?

Cash advances may not be the best way to borrow money due to their high interest rates and fees. They are more expensive than other borrowing options, making them an expensive way to access quick cash.

Is a cash advance bad for your credit?

A cash advance can be bad for your credit if you can’t repay it promptly. High interest rates can lead to accumulating debt, which can lower your credit score if you miss payments. Using a significant portion of your credit limit for cash advances can lower your credit score.

Do payday loans hurt your credit?

Payday loans can hurt your credit if you fail to repay them on time. Many payday lenders don’t report to credit bureaus, but if your account is sent to collections, it can damage your credit score. The high interest rates and fees associated with payday loans can lead to a cycle of debt, making it harder to manage your finances and maintain good credit.

What is the limit on a cash advance?

The limit on a cash advance is often a percentage of your credit card’s overall credit limit, around 20% to 30%. So if your credit card has a limit of $5,000, your cash advance limit might be between $1,000 and $1,500. The limit can vary depending on your credit card issuer and account terms.

What happens if you don’t pay back a cash advance?

If you don’t pay back a cash advance, you will accrue high interest charges and potentially incur late fees. This can increase your debt. Your credit card issuer may also report the missed payments to credit bureaus, harming your credit score. Continued nonpayment could lead to your account being sent to collections.

What is the greatest risk of a payday loan?

The greatest risk of a payday loan is falling into a cycle of debt. Due to their high interest rates and short repayment terms, many borrowers find it difficult to repay the loan on time and may need to take out additional loans to cover the original one. This can lead to accumulating debt and financial instability, making it hard to break free from the cycle of borrowing.

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