Cash advance loan has lately become a well-liked type of interim loan. Intended to provide people with money quickly, lenders usually guarantee an instant decision on your application for a cash advance loan. Not only does this provide you with the money you require, but also gives relief in extremely stressful situations. These advance cash loans are generally necessary to cover an unforeseen expenditure.
What is a Cash Advance Loan?
A form of a loan with the intention of providing people with money easily and instantly, a cash advance loan is generally used in unanticipated emergencies. Since these loans are usually for small amounts such as £1,000, they mark a short repayment term. Due to the increasing popularity in the UK, many lenders have begun to offer advance cash loans.
Cash advances commonly feature sheer fees and interest rates. However, they seem attractive to borrowers due to quick funding and fast approval. These services are typically provided by a bank or another lender. Nevertheless, these days, many credit card issuers permit cardholders to withdraw an assured amount of cash. The minimum age for debit card age requirement in the USA is 18.
Various types of cash advance loans are available to borrowers. These are as follows:
#1 Credit Card Cash Advances
Although many kinds of cash advances are available, the ones that take over the market dominate on the basis of fees and interest rates. Therefore, the most popular kind of cash advance is borrowing through a credit card on a line of credit. A check or an ATM can be used to withdraw the money, based on the bank’s rules and regulations.
Credit card cash advances commonly have a high-interest rate. This is even higher as compared to the rate on standard purchases. For example, you may have to pay about 24% which is approximately 9% more than the average APR (annual percentage rate) for purchases. Moreover, there is not any grace period and the interest starts mounting up instantly.
The fees of these advances can either be a portion of the advanced amount or a flat rate. In addition, whenever you use an ATM to withdraw cash, a small usage fee will be charged.
#2 Payday Loans
When it comes to consumer lending, the term ‘payday loan is often used instead of ‘cash advance’. Generally, payday loans range from £100 to £100,000. However, some lenders may offer even larger amounts of loans. These kinds of loans come with fees, such as £15 for every £100 borrowed. The interest rates commonly exceed 100%. Instead of considering the credit score of the borrower, the lender takes into account the amount of the loan depending on the monthly income of the applicant and government regulations. Once the loan is approved, the borrower can get the money through cash from the lender or through an electronic deposit if the transaction occurs online.
The loans must be repaid to the lender on the borrower’s next payday since these loans are extremely short-term. However, in case the borrower extends the loan, further interest is charged. Unfortunately, over 80% of all loans of the such kind tip within a month of the preceding loan.
Even though the procedure may be more complex than securing a credit card cash advance, it is quicker. In order to get a payday loan, the borrower has to write a post-dated check to the payday lender for the amount they wish to borrow which includes the fees. The lender issues the amount immediately but idles away the hours to cash the borrower’s check until payday.
In general, lenders demand borrowers to provide proof of income and personal identification when they apply. Certain employers grant payday loans as a facility to their employees. Although the terms differ, interest and fees are not charged.
#3 Merchant Cash Advances
Merchant cash advance loan refers to loans that are received by merchants or companies from banks or other lenders. Usually, businesses that do not have perfect credit use these to fund their activities. And sometimes, a part of the finances the business gets from deals in its online account or future credit card receipts are used to pay these advances.
Instead of using the credit score of a business, lenders usually survey their creditworthiness by looking at various data points. This includes the amount of money the borrower gets in PayPal.
Calculating Interest Rate on a Cash Advance Loan
Whenever you borrow money, an interest rate is applicable. This rate is then converted into APR to express it as a percentage that depicts the yearly cost of funds over the period of the loan. Although it does not consider compounding, any additional fees or costs that are associated with the transaction are taken into account. Therefore, calculating APR makes it easier for you, as a borrower, to find out the total amount that you will have to pay when the term of the loan ends.
Using APR as a unit for rate of interest will help you determine which lender will cost you the least since the fees, additional charges, and interest rates differ from lender to lender.
APR is expressed in terms of an interest rate, which is why its unit is a percentage (%).
In case you are not provided with the APR but know how much the interest rate and the fees of a lender are, you can simply calculate it using the given formula:
Principal = Amount of the loan
________________________________________________ = Number of days in the term of the loan
Interest = Total interest paid over the term of the loan
Whenever a loan is offered to you, it is with either variable or fixed APR. A variable APR’s interest rate changes, while that of a fixed APR is guaranteed to remain constant throughout the period of the loan.
Using cash advances rarely is okay if you utilise them for short-term emergencies. However, if borrowing money in this way is becoming a habit of yours, then you must be alarmed about the budgeting issues that you are likely to face in the future.