What is The Difference Between Payday Loan and Cash Advance?

Last Update: February 13, 2021 • Loans •

If you do an online search or two looking for unsecured loans, you may have seen these two terms: payday loans and cash advances. Some people tend to use them interchangeably. They are both types of online personal loans, but they are different. There are many other types of personal loans that range from small loan amounts to large loan amounts. Some larger personal loans can be repaid over a period of a few years. But payday loans and cash advances are typically considered short-term loans taken out to help with some immediate expense like paying for an emergency or past due bills.

Explanation of Payday Loans

Payday loans are also known by names like “online personal loan” or “payday advances.” This type of loan is an unsecured loan, which means the borrower doesn’t have to add collateral. There is also not usually a credit check required to be approved for this type of transaction. Characteristics of payday loans include:

Granted, based on your income.
Designed to be paid in full on a specific date.
Usually paid back using your paycheck.
Occasionally payment arrangements are made, but this is rare.

What about an online payday loan?

Payday loans can be obtained at a local facility where the agency is located or taken out online. Online payday loans:

Are granted only if you have a bank account in good standing.
Are transferred directly into your bank account.
Repayments are deducted electronically automatically on the due date.

When you get a payday loan at a facility, you will usually give them a post-dated check, which will be deposited on the due date, usually on your up-coming payday. Online payday lenders sometimes require that borrowers give a canceled check so that they can make an electronic payment from your account.

Are there any maximums for payday loans?

The total amount that you can borrow usually depends only on your income and your next check.

Most sites require you to make at least $1000 a month to extend you a line of credit.
Those who make more than $1000 per month may be able to borrow more as long as they can verify their income.
Payday lenders do not usually perform or rely on credit checks.
Payday lenders might check a national database to see if you have other outstanding payday loans.
Even though your credit score is not a factor for obtaining a payday loan, you may be turned down if you have filed for bankruptcy.

Explanation of Cash Advances

Some people use cash advance and payday loans synonymous, and there are some basic similarities. There are basically three types of cash advances.

One type of cash advance is structured similar to a payday loan or a personal loan in that the amount borrowed is based on your income. They are also designed to be repaid in a month or when you get your next paycheck.
Another type of cash advance is based on your line of credit or a credit card. Instead of being based on your income, it is based on our credit card’s available credit. It is treated more like a purchase that you make with your card, and the credit card policies and terms define the repayment procedure.
The third cash advance is obtained directly from your employer. In most cases, employers do not charge extra fees or interest but take the money out of your subsequent checks. This is the least common type of cash advance.

Obtaining cash advance from credit card

Cash advances on a credit card can have a very high-interest rate. It can also carry a hefty transaction fee. You can use any ATM to get your cash advance, but the ATM may also charge you another price. The interest is the tricky part of a cash advance on a credit card.

Sometimes the credit card company separates the balances from purchases and a cash advance, but the monthly payment can be applied to both balances.
If a borrower only pays the minimum required payment, credit card companies can apply the balance with the lower interest rate.
Before taking out a cash advance, always check the card’s features, terms, and conditions.

Which is Better, a Payday Loan or a Cash Advance?

Either one can give you a better deal depending on your financial situation. Which one works better for you depends on your credit card and the terms of the payday loan. Sometimes credit card companies have higher interest rates on a cash advance than they do on regular purchases.

Unsecured loans have higher interest rates because there is a higher risk of them not being paid back.
Some online payday loans offer lower interest rates to customers who frequently borrow if they have good payment records. This demonstrates that they are at a lower risk rate.
Payday loans do not usually require a credit check, but a cash advance from a credit card will rely on one to obtain the line of credit.

These are viable options for you if you need quick cash to take care of an urgent financial matter. They both have higher than normal interest rates and fees associated with them. The main thing to be concerned about is being able to pay them back on time. The cash advance might end up affecting your credit score if you do not make the payments on time since most credit card companies report payment habits to the major credit bureaus. As long as you pay the regularly scheduled payments on time each month, they can improve your credit score. But a payday loan will not always help improve your credit score but can affect it negatively if you don’t pay it off on time.