What is a Cash Advance?

A cash advance is a form of short-term borrowing where you get a cash loan — usually from a credit card. You can withdraw your cash through an ATM or inside a bank or credit union. You can put the cash toward any expenses you wish, whether it’s a car repair or your groceries.

While a cash advance can be convenient — especially when you’re in a financial bind — they’re usually expensive. Weigh the pros and cons before getting out a cash advance.

How Do Cash Advances Work? 

To get a cash advance, you can take it out via an ATM, go to a bank and withdraw the money over the counter, or receive a check from the bank. Keep in mind that there’s a daily limit to the amount you can withdraw from an ATM — usually around $300—$500 but sometimes more.

Most credit cards offer a cash advance. But contrary to popular belief, you can’t borrow up to your credit limit. How much cash you can borrow depends on your cash advance limit, which is set by the credit card company. This limit can be found somewhere on your credit card statement or online account. The amount varies — but is likely to between $100 and $800, or a percentage of your overall credit limit. If you have a balance on the credit card, your cash advance limit might be lower.

A cash advance is similar to adding an extra charge to your credit card, but an advance usually isn’t paid off in the same way as other transactions. Usually the interest rate is higher — making the repayment very expensive.

The Downsides of a Cash Advance

A cash advance might be convenient, but it’s one of the most expensive ways to borrow money. Your credit card company benefits the most —  charging you steep transaction fees and high interest rates.

Here’s a breakdown of why you should proceed with caution if you’re considering a cash advance.

Expensive fees: You might be wondering, “what is a cash advance fee?” A cash advance fee is a flat rate or a percentage of the amount you withdraw — usually at least 3 percent and sometimes as much as 5 percent. That means if you get a cash advance of $1,000, the fee could be a hefty $50. If you withdraw the money from an ATM, you’ll also be charged an ATM transaction fee.

High interest rates: Cash advances don’t usually qualify for discounted rates, and the APR tends to be a lot higher than the rate for other purchases, sometimes as high as 27—30 percent APR.

Immediate interest charges: Unlike other credit card purchases, interest starts accruing as soon as you take out the money.

Possible damage to your credit score: When you take out a cash advance, your credit utilization rate increases. If you’re using more than 30 percent of your total available credit, your credit score may take a hit.

Payment allocation rules: Taking out a cash advance creates two balances on your card: one for the advance and one for your purchases. Usually, the credit card company applies your monthly payment to your purchase balance first. This means your cash advance debt continues to accrue interest at a high rate and it may take longer for you to repay your cash advance.

Other Options To a Cash Advance

If you find yourself needing to take out a cash advance, you may need to reassess how you’re budgeting. You should also consider other less expensive ways to get the money you need.

Borrow from friends or family: While it can mean swallowing your pride, asking friends or family for a low-interest — or even interest-free — loan is a great alternative to a cash advance. Friends and family are likely to be more flexible about repayments, and you won’t be sucked into making repayments at high interest rates.

Take out a less expensive loan: If you have good credit, there are several alternatives to a cash advance. A peer-to-peer loan is a loan from one individual to another — matched through a lending website. Interest rates can be anything between 1% and 35% but are typically between 3% and 8% — much lower than the cash advance rate. You could also consider a personal loan, which can be paid off over several months or years at a fixed interest rate.

Consider side income: Picking up an extra shift at work or babysitting a couple of nights a week can get you the cash you need. Even making small adjustments to how much you spend can add up.

Before making a financial decision like getting a cash advance, make sure you’ve reviewed the costs and alternative options. Overall, a good monthly budget is the best tool for achieving financial stability.