Cash Advance: Meaning, Types, and Impact on Credit Score

When financial emergencies arise, individuals often turn to cash advances for immediate relief. However, this swift solution demands caution. Cash advance loans, commonly facilitated by credit card companies or banks, offer rapid access to cash but come with distinct implications.

Getting into their intricacies – the types available and their repercussions on credit scores – is essential for informed financial decisions. Let us understand the cash advance loan meaning, the workings of cash advances, getting an understanding of their meaning, varieties, and the detailed impact they have on creditworthiness. Many cash advances usually involve high charges, which could hurt your credit score if not managed well.

What is Cash Advance?

Cash advance means a short term loan typically provided by credit card issuers or payday lenders. It allows cardholders to withdraw cash up to a certain limit from an ATM or bank branch, functioning as a way to get cash when needed. It is essentially borrowing against your credit, and in simple terms helps define cash advance for users seeking quick funds.

While convenient in emergencies, cash advances often come with high fees and a higher interest rate, making them an expensive form of borrowing. They should be used sparingly and only when other options are unavailable. A cash advance is a short-term solution and not a long-term financial tool.

How Does Cash Advance Work?

A cash advance serves as a short-term borrowing option facilitated by your credit card issuer. When you opt for a cash advance, you're allowed to borrow against the available credit line on your card. There are various methods to obtain a cash advance, and many individuals take out a cash advance or get a cash advance during emergencies:

• ATM: With a PIN, you can withdraw cash directly from an ATM. If you don't have a PIN, you can request one from your card issuer. This process helps you get cash instantly.
• Physical Visit: You can visit your bank or credit union (like Urban Cooperative Banks) counter at select locations and request a cash advance using your credit card.
• Digital Wallets and UPI: Some credit cards now allow you to cash out funds to digital wallets or bank accounts via UPI transactions, though charges and approvals apply. This is another way to access cash.

Also Read: Instant Cash Loan Online in a Few Mins

Types of Cash Advances

Exploring the various forms of cash advances can help individuals understand their borrowing options and make informed financial decisions. These are loans available for people who need quick cash.

Credit Card Cash Advances

Credit card cash advances are a popular option for accessing funds quickly, typically available through ATM withdrawals or bank cheques. However, they often come with higher interest rates compared to regular credit card purchases, and interest starts accruing immediately without a grace period. Additionally, these advances may incur fees, such as a credit card cash advance fee, making them a costly borrowing option. So, remember to use your card's cash advance feature wisely.

Merchant Cash Advances

Merchant cash advances are loans provided to businesses by banks or alternative lenders like NBFCs. These are suitable for those with poor or no credit scores. The advances may be repaid through future credit card receipts or a portion of sales collected via digital payment methods like UPI or digital wallets linked to the business's bank account. Alternative lenders assess creditworthiness based on various factors beyond just credit scores, offering an alternative way to get cash for business needs.

Payday Loans

Payday loans, offered by specialised NBFCs and digital lenders in India, come with relatively high fees and interest rates. These loans typically do not rely on detailed credit scores but instead depend on government-issued ID and the applicant’s salary or pay slip to determine the loan amount. Approved loans are electronically credited to the borrower’s bank account. These often appeal to those who want to get a payday loan quickly when traditional loans are not accessible.

Also Read: Apply Instant Cash Loan in 1 Hour in Emergency

How to Repay a Cash Advance

Repaying a cash advance should be planned carefully because interest begins from day one. Most credit card providers follow a payment-allocation rule where the amount you pay first goes toward the balance with the highest interest rate, which usually includes cash advances. This also affects your cash advance balance and even your credit utilisation ratio.

To reduce the total cost, consider paying more than the minimum amount and clear the cash advance amount as early as possible. Making multiple small payments, tracking due dates, and avoiding fresh credit card spending can also speed up repayment. This helps in paying off the cash advance efficiently and contributes toward overall credit health.

Pros and Cons of Cash Advance

The following are the advantages and drawbacks of cash advances to help you make informed financial decisions.

Pros

• Provides quick access to funds, especially in emergencies
• Offers convenience as an accessible source of funds anytime via ATMs
• Can be a useful tool for managing immediate financial needs
• Provides a quick solution when traditional borrowing options are limited

Cons

• Cash advances often carry high interest rates, making them an expensive borrowing option
• Cash advances typically come with fees such as ATM withdrawal fees and cash advance fees
• No grace period - interest starts immediately from transaction date
• The ease of access may lead to overspending, debt cycles, and CIBIL score

Also Read: Urgent Need of Cash? Here Is How You Can Get an Instant Cash Loan Online?

Alternatives to Cash Advances

While opting for a cash advance may seem like a quick fix, it often leads to accumulating debt rapidly. It's advisable to explore alternative options with more favourable terms:

• Borrow from family or friends: Despite the potential discomfort, seeking a loan from loved ones can be a cost-effective solution. Establish a clear repayment plan to maintain healthy relationships.
• Personal Loans: An instant personal loan online typically offers better terms compared to cash advances. With good credit, you can access larger sums at fixed rates lower than those charged by credit card issuer. This is helpful for those who don’t want to use a cash advance.
• Balance transfers: Moving your credit card dues to a card with a lower rate can give you time to repay without the pressure of soaring interest.
• Emergency funds: Building a small emergency fund helps you handle sudden expenses without turning to costly short-term credit. Even a modest amount saved regularly can make a big difference.

Some individuals also prefer cash advance apps as temporary solutions.

Also Read: 8 Simple Ways To Get Emergency Money

What is a Cash Advance Fee?

If you’re new to the concept, you may wonder what is a cash advance fee or what is a cash advance fee in a credit card. A cash advance fee is a charge levied by your credit card issuer every time you withdraw money through a cash advance. It is usually calculated as a percentage of the withdrawn amount or as a flat fee, whichever is higher. This fee is applied upfront and adds to the overall cost of borrowing. Many lenders also charge a cash advance fee based on the cash advance amount or the amount of cash withdrawn. Since cash advances also come with higher interest rates and no grace period, the fee increases your total repayment, making the transaction more expensive than regular card use.

Cash Advance Credit Card Limits Explained

Your cash advance credit card limit is the maximum amount you can withdraw as cash from your credit card. It is separate from your overall credit limit and is usually much lower, often around 20–40% of the card’s total credit line. This cash advance limit is set by the issuer based on your credit profile and risk assessment. You cannot exceed this limit, even if your remaining credit limit is higher. Understanding this limit helps you plan better and avoid declined transactions during emergencies. Many consumers check their credit card limit or total credit limit before taking action.

Conclusion

While cash advances provide immediate relief during financial crises, they also have some disadvantages. So, it's crucial to explore alternative borrowing options with more favourable terms. By doing so, you can ensure long-term financial well-being and stability. Opting for solutions with lower costs and better repayment conditions can reduce the risks associated with cash advances, ensuring better financial management in the future. For many, choosing a bank or NBFC or structured loan instead of trying to take out a cash advance can make a meaningful difference in maintaining healthy finances.

Frequently Asked Questions

How much cash advance can I take?

The cash advance limit on your credit card determines how much cash you can withdraw. It is usually lower than your total credit card limit and varies by issuer.

Will paying my cash advance the same day stop interest?

Even if you pay a cash advance the same day, interest usually begins immediately. Early repayment reduces overall cost, but credit card cash advances rarely have a grace period.

Can I use a cash advance to pay other credit card bills?

Using a cash advance to pay other credit card bills is possible but risky. High interest rates and cash advance fees can lead to mounting credit card debt quickly.

Can I get a cash advance with bad credit?

You can still get a cash advance with bad credit through some lenders or NBFCs, though fees and cash advance APR may be higher compared to regular borrowers.