When you're faced with the need for some quick cash, taking a cash advance on your credit card or signing up for a short-term loan can seem like good solutions. While these options offer a quick fix to your financial dilemma, they don't come without a price. Relying on cash advance loans can lead to serious financial trouble.
Credit card companies make it easy to obtain a cash advance whenever you wish. By issuing a personal identification number, the company allows you to use your card just like a bank ATM card to withdraw funds on the go. Your card issuer may also send you blank cash advance checks to use to pay bills or make a purchase. While these methods offer convenience, you can also rack up a lot of debt in a short period of time if you're not careful.
Fees and Interest
Cash advances are not cheap. When you take a cash advance on a credit card, you are normally assessed a flat fee, usually around $10 according to the Kiplinger website. Some companies charge a percentage of the total advance. In addition, you'll pay a higher interest rate on cash advances than when using your card to purchase goods or services. And unlike with purchases, there is no grace period before interest is charged on a cash advance, making it extremely difficult to minimize the damage.
Substitute for Saving
You may be under the assumption that because you have access to a cash advance whenever you need it, there's no need to set aside money for financial emergencies. A 2011 National Foundation for Credit Counseling Survey points out that 64 percent of Americans do not have the cash on hand to handle even a $1,000 emergency expense. If you have to rely on a cash advance to cover an emergency, you can find yourself with a debt load that could lead to financial ruination.
Payday Loan Woes
Another common form of cash advance is the short-term payday loan that you've probably seen advertised on television. With a payday loan, you pay the lender an upfront fee and write a postdated check to cover the amount of the loan, which typically comes due in about two weeks. If you can't cover the check, the lender will assess additional fees and interest on the balance. Some lenders will let you roll over the balance for another two weeks, but that only leads to additional charges. Before you know it, you're in a debt trap from which it is difficult to escape.
Chris Joseph writes for websites and online publications, covering business and technology. He holds a Bachelor of Science in marketing from York College of Pennsylvania.