Whether you call it a cash advance, payday loan, or an online installment loan, any short-term loan taken out against your next paycheck is one that could cost you dearly if you don’t know what you’re doing. This is not to say that cash advances are a bad thing. They are not. But you do have to understand what you’re getting into before you decide to apply for one.
Cash advances are normally made by payday lending companies or local check-cashing centers. Employers may offer cash advances against worker pay, but that is a different matter altogether. A cash advance from employer usually comes directly out of your next paycheck.
A cash advance from a payday lender is really just a short-term loan. You borrow on a promise to pay back the amount on a certain date. As long as you do, everything is fine. But fail to repay and you could find yourself in financial trouble.
Here are 5 things to know about cash advances before you get one:
1. They Come with Interest and Fees
Most loans come with interest and fees regardless of the length of term. Cash advances and payday loans tend to have comparably high interest when stacked up against car loans and mortgages. Double-digit interest is not unusual. Also note that lenders often assess fees and charges on top of interest.
2. They Are Fairly Easy to Get
Cash advances are typically easy to get compared to other forms of credit. Do not construe this as being either good or bad. It is just the fact. You can usually get a cash advance with a pay stub and a bank account. Of course, you do need a a source of regular income.
3. They Are Convenient
Next is the convenience cash advances offer. For people in need of quick short-term funding, the cash advance represents easier access to money than going to your bank and applying for a personal loan. Like the previous point, this is presented as neither good nor bad. It is what it is.
4. They Are Not a Substitute for Savings
Unfortunately, people who have easy access to cash advances often allow that access to cloud their thoughts about saving. Knowing that a cash advance is usually requested to cover an emergency financial need, it is far better to put money away in a savings account for those same emergencies.
Cash advances cost you money by way of interest and fees. Saving is free. Moreover, you can actually earn money on your savings by putting it into an interest-bearing account. It is always there in the event of an emergency.
5. They Can Be a Trap
Last but not least, understand that payday loans and cash advances can be a trap. If you take one out and then cannot afford to repay it on the due date, rolling it over into a new loan will cost you even more via interest and fees. Rollover a cash advance too many times and you could find yourself thousands of dollars in debt.
Cash advances and payday loans are financial tools that work well for some people. For others, not so much. The key is fully understanding how these loans work so that you are capable of making a wise decision. Do not ever take out a cash advance without knowing for sure what it is you are getting into. And whatever you do, don’t fail to pay your loan back on its due date.