What is a 'Cash Advance'
A cash advance is a short-term loan from a bank or alternative lender. The term also refers to a service provided by many credit card issuers allowing cardholders to withdraw a certain amount of cash, either through an ATM or directly from a bank or other financial agency. Cash advances generally feature high interest rates or fees, but they are attractive to many borrowers as they also feature fast approval and quick funding.
BREAKING DOWN 'Cash Advance'Credit card cash advances typically carry a high interest rate, even higher than the credit card itself, and the interest begins to accrue immediately. In most cases, credit card cash advances do not quality for low interest rate introductory offers. On the plus side, credit card cash advances are quick and easy to obtain.
Merchant Cash Advances
Merchant cash advances refer to cash advances received by companies or merchants from banks or alternative lenders. Typically, businesses with less-than-perfect credit use cash advances to finance their activities, and in some cases, these advances are paid for with future credit card receipts or with a portion of the funds the merchant receives from sales in his online account. Rather than using a business' credit scores, alternative lenders often survey the creditworthiness of the borrower by looking at multiple data points including how much money the merchant receives through online accounts such as PayPal.
Cash Advances and Payday Loans
In consumer lending, the phrase cash advance also refers to payday loans. Payday loans are short-term loans that typically must be repaid on the borrower's next payday, along with a fee. Rather than taking into account the borrower's credit score, the lender determines the amount of the loan based on the laws in the state and how much the borrower earns each paycheck. If the loan is approved, the lender hands the borrower cash if the loan is being granted in a storefront, and if the loan takes place online, the lender sends an electronic deposit to the borrower's checking or savings account. To ensure repayment, the lender either takes a post-dated check from the borrower or has him sign an agreement for an automatic payment.
Direct Deposit Advance
Another form of cash advance is a direct deposit advance. With this lending tool, banks give their customers advances on their direct deposits. Then, when the deposit is made, the bank recoups the loan and the associated fees. In most cases, the repayment for the cash advance is taken out of the account before any other checks, charges or automatic payments are allowed to post. In 2014, after receiving numerous complaints about the fees related to their cash advances, many major banks discontinued the practice.