When most people think of loans, they are reminded of visiting loan officers in their banks or credit unions, filling out massive amounts of paperwork and then waiting as their credit is checked. Unfortunately, consumer credit in this fashion is becoming harder and harder to come by. Thankfully, cash advance or payday loans, exist to provide consumers who have less-than-perfect credit with the cash they need in emergency situations.
What is a Cash Advance?
A cash advance is a short-term loan for a small sum of money, typically only offered to people in stable employment, and intended for one-off, unexpected costs. Life doesn’t always go the way we plan, and bills sometimes need to be paid before payday.
A short-term cash advance can make the difference between paying that bill in full and bouncing a cheque.
Cash advances are unsecured loans, meaning that there is no collateral and usually no credit check required for approval. They are granted based on your income and are designed to be paid back on a specified date that corresponds to your pay dates. Sometimes they can be paid back in multiple payments, but usually you are required to pay back the entire amount plus fees in one payment.
Generally, the company making a cash advance loan only requires proof of employment and/or income and a bank account as verification of your ability to repay the cash advance.
Cash advances are known by a number of names such as cash advances, short term loans, quick loans and salary or wage advances. This makes giving a complete definition for cash advances difficult and indeed the different names shows how they mean different things to different people. Again, none of all this is particularly helpful until you take a deeper look at the fundamentals of this form of credit.
Fundamentals of Cash Advances
- The loan is paid back when you receive your next paycheck or another agreed-upon date, often within a two-week or one-month period.
- You provide a postdated check or access to your checking account so the lender can process payment for the balance plus fees and interest on the agreed-upon date.
- Your information will be registered in a statewide database, ensuring that all payday lenders have your most up-to-date loan information.
- You may only borrow a certain percentage of your gross monthly income.
- You may only take 8 cash advances per 12-month period.
- Lenders may not harass or intimidate you when collecting a loan. If you are harassed, file a complaint.
- The loan term cannot exceed 31 days or be less than 7 days.
- A borrower must pay a previous loan in full and wait 24 hours before entering into another loan.
When did it all begin?
The practice of borrowing money against a post-dated check dates back at least to the Great Depression (1929-1939), when most Americans were struggling to make ends meet, but the astronomical rise of payday lending in the United States occurred only in the early 1990s. The stage was set for this boom in the late 1980s, when the federal government relaxed restrictions on how much interest a lending institution could legally charge.
When do you need a Cash Advance?
Cash advances are designed for short-term use only. Often they are used in an emergency or where a short-term cash shortfall has occurred that is expected to be resolved in a short period of time – for example, paying an unexpected, urgent bill when you don’t have enough funds but know that the next payday is just around the corner. A cash advance could also come in handy to cover:
- Urgent medical bills.
- Car repair.
- Unexpectedly high power bills.
- Washing machine or fridge repairs.
What are the different types of Cash Advance?
1 Hour Cash Advances
1 Hour Cash advances are processed within the hour. All you have to do is fill in an online form. Processing your loan is made easier if the details submitted by you are accurate to the core. Once the company has verified your details, you will receive the money in your bank account.
30 Day Cash Advances
While most Cash advances use a 14 day time frame for repaying a loan, the 30 Day Cash advance will adjust to your pay schedule if your paycheck comes monthly. Fees will vary according to how long the period is. In general, the longer the time period, the higher the fee will be.
Bad Credit Cash Advances
Bad credit cash advances are ideal for people with a low credit score. All a borrower needs is a valid checking account and proof of income. But since there is an inherently higher default risk for the lender, the premium for these loans is also higher. On the plus side, bad credit loans are allotted quicker than other loans due to the exclusion of the credit checking process.
In-store Cash Advances
This option allows you to receive your money in person at your lenders’ store. The entire process typically takes about 10-15 minutes.
Online Cash Advances
This option gives you the convenience of processing your loan completely online without the need to visit a store. You submit an online loan application, and if approved, the funds from this personal loan are deposited directly into your bank account, typically by the next business banking day.
How does a Cash Advance work?
- You give the lender a check for the amount of money you want to borrow – plus a fee.
- The lender keeps your check and gives you cash – less the fee they charge.
- On your next payday, you have to pay the lender in cash. You owe the amount you borrowed plus the fee.
What is the cost of a Cash Advance?
When it comes to cost, there are two numbers to know: the interest charged and the fee. The interest is usually expressed as a percentage of the amount borrowed whereas the fee is a flat rate. For example: a $100 cash advance with a $20 fee and a 10% interest rate would cost $30 to borrow. That’s an overall rate of 30%.
What is the Fee for a Cash Advance?
Cash advances generally charge a fixed fee on the amount you borrow. While the exact fees, you are charged will vary depending on the total amount of money you borrow, credit providers are only allowed to charge you the following:
- A one-off establishment fee.
- A monthly account keeping fee.
- A government fee.
- Default fees.
- Enforcement expenses (if you fail to pay back the loan, these are the costs of the credit provider going to court to recover the money you owe them)
Typically, a $100 loan for a month has a fee of around $25, so you need to repay $125. To put that in context, if you borrowed the same amount on a bog-standard credit card at 20% APR, then provided you didn’t miss any repayments, it would cost $20 to borrow $100 for a year – $5 less than payday lenders charge for just one month.
What is APR?
The annual percentage rate (APR) measures how much a loan would cost if it were outstanding for a full year. The APR is calculated by adding up how much interest borrowers will pay and how much other additional fees and extras will cost overall. This figure is then averaged out over a year to provide a figure which allows consumers to compare the borrowing cost between different lenders.
What if I can’t pay the Cash Advance?
Under law, you are entitled to enter into an interest-free repayment plan with your lender after you’ve been in debt for more than 35 days. Additionally, the law prohibits lenders from issuing a new cash advance if it would result in your being in debt for more than 45 days in a row. This gives payday borrowers some breathing room to pay off their old cash advance debt without getting buried under additional charges and fees.