What is the Difference Between a Cash Advance and Payday Loan?

When it comes to finances, a lot of things come down to luck and timing.

Let’s say your car breaks down unexpectedly on the side of the highway, and the part you need to repair is expensive. 

That’s unfortunate on its own, but if you’re really unlucky, this expense might arrive when you’re out of cash, and payday is too far away to help. This kind of bad timing could mean you need to borrow money to get back on the road. 

With your payday playing such a big role in your finances, it may seem natural to choose a payday loan for help. These financial products are designed to float you cash until you get paid. They’re easy to find online, they move cash into your hands relatively quickly, and sometimes, you can get one without a credit check.

In your search for payday loans, you might come across financial institutions calling them cash advances. You may even see them advertised as payday cash advances. But are they the same thing? Not exactly. 

What is a Payday Loan?

A payday loan or advance is a short-term, small-dollar loan you’ll receive and repay in one lump sum. In many cases, they provide roughly $500 that you have until your next payday to repay, which gives the average borrower about two weeks. 

They usually cater to borrowers who can’t get approved elsewhere, so you might have better luck qualifying for one if you have bad credit. Some lenders may not even check your score.

This might seem like a perk, but it’s evidence that payday cash advances are notorious in the financial world for being potentially risky. Financial institutions check your credit, among other things, as a safeguard to ensure you can afford what you borrow. 

Some no-credit-check lenders don’t care if you can afford their help. In fact, they’re hoping you’ll have to extend your terms or re-borrow so that you owe them more.

The Department of Financial Services labels them as a potentially dangerous option for two reasons:

1. They’re a high-cost financial product: Payday options come with three-digit Annual Percentage Rates. APR represents the total cost of borrowing over the financial product’s lifespan.
2. They have a short turnaround: At most, you might get a few weeks to repay what you owe. Shortening your repayment term like this can make it challenging to hit due dates, especially if you borrow because you’re low on funds.

How Are They Different from Cash Advances?

Technically, a payday loan is a type of cash advance, which is a term to describe any small-dollar, short-term financial product designed to help you take on unexpected emergency expenses. 

Just how small and short they end up being depends on a lot of factors. Other cash advances may come with different costs and terms, giving you an alternative way to repay what you owe. 

What Are the Different Kinds of Cash Advances?

Besides payday loans, here are the three main kinds:

1. Online Installment Loans

If a short turnaround is too challenging for your finances, an online installment cash loan may be an alternative. These financial products tend to offer more money, which arrives in one lump sum. However, you’ll be able to repay what you owe over multiple fixed payments. 

These longer terms are one of the benefits of cash loans online, as you’ll be able to break up your amount owing — potentially letting you make smaller payments than you would with a payday cash advance. 

Rates fluctuate greatly with this option. If you’re taking out an installment loan for bad credit, you may have to pay higher interest.

2. Lines of Credit

A line of credit is a different way to borrow more money, making them an option if you need more than $1,000. Rather than receiving your funds all at once, you’ll receive a limit from which you can withdraw as you need — whether that’s all at once or in small increments. Once you pay off what you owe, you’ll have this limit available again for the next time you’re in an emergency. 

Interest accrues differently with this option. Unlike other advances, which start accruing interest as soon as you receive the funds, you’ll only earn interest on the withdrawals you make. How much this ends up being depends on your lender and your credit score. 

Another difference with lines of credit is how you repay what you owe. Rather than following a fixed payment schedule, you’ll have the option to pay off your usage in full or through a minimum payment. The minimum payment is a flat fee or percentage of your overall balance, making it a helpful option if you’re tight on funds. 

Just note that you’ll carry over a balance that may be subject to additional interest and finance charges. That’s why most financial experts recommend paying as much as you can. Paying off your entire balance will also free up your limit for the next emergency.

3. Credit Card Advance

A credit card advance is a loan you take out against an existing credit card. You’ll have to pay a flat fee to get one, and the amount you borrow is usually charged at a higher interest rate than your usual one. Unlike a line of credit, a credit card advance starts to accrue interest just like an installment loan. 

What is Better, a Cash Advance or Payday Loan?

This article can’t answer this question for you. It only lays down the facts so that you can make an informed decision the next time you need to borrow money in an emergency. 

While payday cash advances have earned a spotty reputation, there’s a reason why people keep borrowing them. They’re quick and usually easier to qualify for than traditional financial products that require good credit — although, payday advances aren’t the only financial product available for people with bad credit, as you learned here today. 

Whether you get a payday loan comes down to whether you can afford its high rates by the next time you get paid. If this sounds challenging, it’s a sign you should review your other options. 

Take the time to research other cash advances and look carefully at the going rates and terms available for your credit score. This step will help you find the best option for your finances today.