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Payday Loan vs Cash Advance - What's the Difference?

by Travis L.

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Navigating the world of short-term loans can be overwhelming, especially when you’re in a bind and need cash sooner rather than later. From cash advances and payday loans to title loans and everything in between, you may be wondering which loan option to choose and what the difference is between them.

The terms payday loan and cash advance are often used interchangeably, making it difficult to determine exactly what type of loan you’re getting and what the terms will be. We’re here to break down the differences between payday loans and cash advances and provide the pros and cons of each.

What Is a Payday Loan?

Payday loans are short-term loans that allow you to borrow funds to cover expenses that may come up prior to your next payday. You do not have to provide collateral or go through a credit check to be approved for a payday loan. Each state has its own laws dictating how payday loans can be obtained and what cash amounts you’re able to receive. Some states completely outlaw payday loans.

Typically, payday loans are $500 or less and must be repaid to the lender in a single payment on your next payday, or when you receive income from another source such as Social Security or a pension payment. Your loan agreement will state how soon the amount must be paid back in full, but most payday loans must be paid back within two to four weeks.

To be approved for a payday loan, the lender will most likely ask you to provide your ID and proof of income. Once you’ve been approved, you’ll provide the lender with a postdated check for the amount of the loan plus any applicable fees. When your payment is due on your next payday, the lender will cash the check to regain the amount they loaned you. Some lenders now offer payday loans electronically and will request your bank information to directly withdraw the owed amount from your bank account.

Approval to receive a payday loan is not always automatic. You can be rejected for a number of reasons, including:

  • Insufficient income
  • Not meeting repayment requirements
  • Having an outstanding loan
  • Active-duty military
  • Recently declared bankruptcy
  • Recently bounced checks
  • Not been employed long enough
  • Having a bank account that was opened too recently

When you take out a payday loan, the lender will most likely charge you a fee, ranging from $10 to $30 for every $100 you borrow. Many states regulate these fees and how much you can be charged.

What Is a Cash Advance?

There are two types of cash advances: traditional cash advances and credit card cash advances. A traditional cash advance is synonymous with a payday loan – you receive a loan to pay for expenses before your next paycheck. Some lenders may call these payday loans while others call them cash advances, but the loans are structured in the same manner. The amount you can receive in the form of a cash advance is dependent on your income and the loan must be paid back on your next payday.

Credit Card Cash Advance

Credit card cash advances allow you to take out a loan against the available balance on a credit card. Think of this way – instead of purchasing goods or services with your credit card, you’re purchasing cash that must be repaid later, just like you would pay off your credit card balance normally.

These loans can come in handy when you don’t have the available money in your bank account but need cash quickly. If your credit card has a PIN number, you can get cash advances directly from an ATM (if your credit card provider allows cash advances). You can also take your credit card to a bank that offers advances in partnership with your credit card provider to receive a loan.

Most credit card companies will not allow you to take out a cash advance for your full credit balance but will cap it around a few hundred dollars. It’s important to note that unlike normal purchases made with your credit card, there is not an interest grace period on cash advances. This means that your cash advance loan will start accruing interest as soon as you take it out.

Like payday loans or traditional cash advances, your credit card company will most likely charge a fee to take out the loan – often between three and five percent, or $5 -10, whichever is greater.

Contact us with any questions you may have about short-term loans or check out the Cash Store blog for money saving and budgeting tips.

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