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Payday loans and cash advances are perhaps the two most popular short-term lending options available to consumers. These are used by people who need to get cash in a pinch, as well as people who want to borrow money but have less than perfect credit. As unsecured, short-term loans, both payday loans and cash advances carry very high interest rates. Consider them only after more attractive alternatives have been exhausted. If you are considering either of these financial options, make sure you understand the differences and risks associated with each.

Sometimes, the term "cash advance" is used as a synonym for "payday loans." In this article, the term "cash advance" only applies to a cash advance received through a credit card service or a line of credit from a financial institution.

Payday Loans

Payday loans are so-named because of a tendency for the funds to be borrowed on a post-dated check cashed on the borrower's upcoming payday. These loans are designed to be quick and easy, and they generally have very limited qualification loan requirements. These are usually options if you do not have credit cards or if you need to borrow more than your credit card balance or limit allows.

Typical payday lending amounts are between $100 to $1,000, though the limit is sometimes kept in check by state law. Lenders usually ask that you provide personal identification, proof of income (or some other ability to repay the loan), and a post-dated check for the balance of the loan plus lender fees. Most applications take 15-30 minutes, and many can even be completed online.

The total costs of payday loans can be the equivalent of paying up to several hundred percent in annual percentage rate interest, even though the funds tend to only be borrowed for a few weeks.

Cash Advances

Cash advances are most commonly offered through credit card issuers. You need to have a credit card or another open line of credit to qualify for a cash advance. A cash advance acts like any other purchase being made through your credit, but instead of buying a good or service, you are buying cash. Repayment terms tend to be very similar to the terms on your card, although the interest rate on the cash advance loan may be higher.

Your cash advance repayment is almost always considered to be separate from the rest of your credit balance. Sometimes, the terms of the loan stipulate that your cash advance balance does not start being paid down until the rest of the charges on the account are repaid. Your high-interest cash advance loan could stick around for a very long time if you do not manage it appropriately.

The APR for payday loans often exceeds 300%, but the interest is either represented in a flat rate or only accumulates for a few weeks. Cash advances might only have an APR between 15-30%, but the interest can build for a while.

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