What is a cash advance?

1 min readLast updated October 5, 2023by Rachel Carey

If you’re running short on cash, you could take out a cash advance to keep you going. An advance is a short-term loan taken out against your bank’s line of credit. But cash advances can come with exorbitant fees and large interest rates, potentially costing you more in the future. Find out more about cash advances and what they can mean for you.

What is a cash advance? 

A cash advance is a short-term loan that allows you to borrow a set amount of cash you will repay. Both businesses and people can receive cash advances and are typically very quick to approve. However, these advances usually come with very steep fees and interest rates, meaning taking out an advance can leave you facing a bigger shortfall in cash than before.  

There are also different types of cash advances, such as credit card cash advances and payday loans, although the latter is prohibited in many states. In all cases, many risks are attached to cash advances, and there may be better alternatives to these loans.  

How does a cash advance work? 

A cash advance works similarly to any other loan. You can borrow a set amount of money before repaying the principal amount you borrowed and interest. Although these loans come with high interest rates and fees, they are usually approved in moments, making them an attractive option for people facing an immediate cash shortfall.  

How do I get a cash advance? 

There are three ways to take out a cash advance.  

The first method involves withdrawing cash from an ATM as you would normally withdraw some money. You will need your card and personal identification number (PIN) and can quickly withdraw a cash advance in a matter of moments.  

You can also visit a bank branch in person to request an advance, while some banks will also let you take out an advance over the phone.  

Alternatively, you may also be able to cash any convenience checks sent after opening your account.  

In all cases, cash advances can be taken out quickly.  

What are the different types of cash advance? 

The most popular type of cash advance is a credit card cash advance. These can be withdrawn from an ATM but usually include an upfront fee and a large interest rate. Unlike other loans, interest begins to accrue immediately on these advances as there is no grace period. As well as having separate interest rates from your ordinary credit card interest, a cash advance will have a separate balance you need to repay.  

A merchant cash advance works similarly. Businesses that don’t have the best credit scores can use merchant cash advances to finance their activities by pre-paying future credit card receipts or using the funds the business receives in its online account. To decide whether or not to lend to a business, lenders will often consider the organization's creditworthiness. For example, some lenders will look at the money received through online accounts.  

Payday loans are another type of cash advance. However, they are prohibited in some states. This is because these loans are extremely short-term—both the principal and interest need to be repaid by the borrower’s next payday. Due to these extremely tight repayment constraints, many of these payday loans are rolled over to the next month. When not managed properly, payday loans can lead to debt traps due to the very high-interest rates.  

Will a cash advance impact my credit score? 

Taking out a cash advance has no immediate impact on your credit score. However, there can be indirect problems.  

Firstly, cash advances come with a separate balance and interest rate to your existing credit cards and accounts. These outstanding amounts start to accrue interest instantly and can quickly drain your money if they aren’t paid off soon.  

Moreover, where your outstanding balance grows, your credit utilization ratio also grows. This measure assesses how much of your outstanding balance is credit, with a high utilization ratio indicating a bigger level of risk to lenders. And, even when paid off, your credit record will still show your historic highest balance, with lenders seeing that you had a higher outstanding balance at one stage than you may have today.  

What are the terms and fees of cash advances? 

Different lenders will offer different terms and fees for their advances, so there’s no set answer to this question. Before taking out a cash advance, review the fees and terms of each advance. There are some key terms to be aware of, including: 

  • Cash advance APR: APR is a measure that shows the total cost of a loan expressed as a percentage of the amount you borrowed, including any extra fees and interest. It is useful for working out how much it will cost to fully pay off any loan or advance you take out. Pay close attention to this figure as this should give you a better idea of how much you will need to pay back in total. 

  • Cash advance fees: This fee is the upfront cost of taking out an advance. The fee is often between three and five percent. If you take out an advance at an ATM, you should also expect to pay a fee on this withdrawal. 

  • Credit limits: If you have set credit limits, this may limit how much of an advance you may be able to withdraw. 

Cash advances are one way of covering short-term shortfalls in cash. But they come with consequences too. If you aren’t prepared, cash advances can leave you facing higher costs in the future, potentially impacting your credit score, too. Before taking out a cash advance, speak to a financial advisor who can help you manage your money and may know better ways of covering shortfalls.

Senior Content Writer

Rachel Carey

Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.