Credit card cash advances vs. payday loans: What’s the difference?

If you find yourself short on cash, you may need to borrow money quickly to stay current on bills or pay for an emergency expense. When this happens, you may consider a credit card cash advance or payday loan. Credit card cash advances and payday loans have at least one thing in common: You can use both to obtain money quickly. But before deciding on either option, it’s helpful to understand key differences between the two.

• A cash advance is a short-term cash loan you take out through your credit card.
• A payday loan is a short-term loan that typically comes with just a few application requirements and a quick turnaround time. Lenders can be online or in-store.

Let’s talk about a few more areas where cash advances and payday loans diverge.

Cash advances vs. payday loans: How much can you borrow?

Payday loans can sometimes trap consumers in heavy debt. Because of this, state governments have stepped in to protect borrowers. You’ll often see limits on how much you can borrow through a payday loan — typically $100 to $1,000, depending on your state of residence.

The amount you can borrow through a cash advance is typically limited to a percentage of your credit card’s limit. Usually, this comes out to a few hundred dollars. Don’t be surprised if your credit card has daily, weekly and monthly cash advance limits in place. It’s very common to see a maximum daily cash advance limit of less that $500.

Bottom line: How much you can borrow depends on your credit limit and your state’s laws.

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What are the repayment terms?

Unlike credit card purchases, a cash advance will typically start accruing interest immediately. In other words, there’s no interest grace period like you get for normal purchases.

Similarly, a payday loan comes with immediate interest. The key difference is the time horizon for repayment. Some lenders require repayment as early as your next payday while others will be more flexible with the repayment dates. But with a cash advance, you can carry debt long-term, if you wish.

Bottom line: Repayment for a payday loan is due much sooner than for a cash advance.

What are the interest rates?

For a cash advance, you need to pay an upfront fee — for example, $10 or 5% of the amount you take out. Then you pay interest on your cash advance, usually around 24% APR. For a payday loan, you’re charged an upfront fee based on how much you borrow — typically $15 to $30 per $100 you borrow. Since the repayment window of a payday loan is around two weeks, that works out to an APR of about 400% and up.

That creates a distinct difference between cash advances and payday loans. Theoretically, you could take out a cash advance today and pay it back tomorrow, accruing very little interest. But regardless of when you repay a payday loan, you still pay the same amount in finance charges.

Bottom line: You’ll pay a set amount in interest for a payday loan. For a cash advance, the interest you pay depends on how long you carry your debt.

How much are the fees?

You’ll be charged a fee as soon as you take out a cash advance. You’ll typically find the cash advance fee written in your credit card terms like this: “Either $10 or 5% of the amount of each transaction, whichever is greater.” With a payday loan, you’ll pay a finance charge of around $15 to $30 for every $100 you borrow.

Bottom line: Upfront fees for cash advances are often cheaper than those for payday loans — but remember that you still need to pay interest on a cash advance.

What are the requirements?

To take out a cash advance, you need to be approved for a credit card that allows them. Meanwhile, all you need to obtain a payday loan is a bank account and an ID. Payday loan centers usually don’t run deep credit checks, so payday loans are typically easier to get than cash advances.

Bottom line: There are usually fewer requirements to get a payday loan.

Cautions to keep in mind with cash advances and payday loans

Now that you understand the differences between cash advances and payday loans, it’s important to consider the drawbacks of both. One drawback is they’re very expensive. In particular, payday loans are notorious for pulling borrowers into endless debt. Because payday loans cost so much, borrowers often have to take out more loans to pay off what they owe.

Cash advances can cost a pretty penny too. Not only do you have to pay an upfront fee to get one, but you also immediately start accruing interest on the amount you’re advanced. What’s worse is the APR will likely be substantially higher than your credit card’s purchase APR.

Most people take out cash advances and payday loans in financial difficulty — but they can find themselves in deeper debt afterward. We recommend turning to a cash advance or payday loan only in a true financial emergency. Read more about alternatives to payday loans and cash advances.
Important things to know before getting a cash advance on your credit card

Bottom line: Which is the better option?

If you’ve decided that short-term lending is the route you’d like to take to solve your immediate need for cash, your ultimate choice between a cash advance and payday loan will depend on several factors. These factors include: whether or not payday loans are legal in your state, the amount you want to borrow and how soon you’re able to pay the money back. You can also check out our guide on short-term loans to further compare your options.

Frequently asked questions

• What are some alternatives to taking out a cash advance or payday loan?

  A few options include asking friends or family for a loan, getting a personal loan, using debt consolidation and taking on quick gigs to collect extra cash. For more alternatives, read our article on avoiding payday loans.

• How do cash advance fees work?

  You’ll usually pay a flat rate or a percentage rate, whichever is greater. For example, the cash advance fee in your credit card terms may be written as: “Either $10 or 5% of the amount of each transaction, whichever is greater.” According to those terms:

  • If you’re taking out a $100 cash advance, you’ll pay a $10 fee. (It’s greater than 5% of $100, which is $5.)
  • But if you’re taking out a $500 cash advance, you’ll pay a 5% fee — this comes out to $25.

  In addition to the fees, you’ll immediately accrue interest on your cash advance.

• How can I avoid having to take out a cash advance or payday loan in the future?

  It’s a great idea to look for credit counseling. A reputable counselor can help you solve the structural issues that led to your financial crunch in the first place, such as overspending or forgetting to pay credit card bills. You can find a credit counseling agency with the National Foundation for Credit Counseling.