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Wondering what is a cash advance? A cash advance is a financial service provided by companies that issue credit cards and charge cards. It allows the cardholder to withdraw cash via an ATM or at a financial agency, up to a specific limit, such as the limit on a credit card.

Purchases which are made using a credit card as cash are also considered a type of cash advance, incurring higher interest rates with no grace period. Should the merchant fail to disclose the nature of the transaction, these purchases will be considered normal credit card transactions. In spite of credit network guidelines, many merchants pass credit card processing fees onto the cardholder in spite of credit network guidelines.

It is not uncommon to find oneself in a situation where credit cards are not accepted. An automobile breaking down on the side of the road, an unexpected taxi ride, or a visit to your local farmer’s market are all situations where cash is preferred. But suppose you don’t have the money in an emergency? A cash advance may be the solution. Cash advances are not difficult to obtain and you don’t need to have money in your bank account in order to qualify.

This is convenient, but taking a cash advance can be a risky financial move. What follows are some considerations that you should make when you feel inclined to take a cash advance to help you to decide whether doing so is right for you.

What are the possible consequences of taking a cash advance?

A cash advance is a short-term loan you can take out using your credit card, up to your credit limit. For most cardholders, cash advances are limited to a few hundred dollars. That means you can’t rely on a credit card in emergencies that incur costs that exceed your credit limit.

While obtaining a cash advance is easy, it is also one of the most expensive ways to get money. This is due to the fact that a cash advance comes with a whole range of fees and costs that an ordinary ATM withdrawal does not.

Each and every time you get a cash advance from your credit card, you will incur a fee. These fees generally amount to between 1-7% of the amount borrowed. Bear in mind, this fee is added to the credit card’s standard purchasing rate. So if a credit card has an APR of 18% and a cash advance has a 3% fee, the total interest you pay will be 21%. Also remember, interest on cash advances begins compounding on the day the advance is made. You may also incur applicable ATM fees for withdrawing cash. Some credit card companies now offer a flat fee for cash advance. These fees can sometimes be lower. Nevertheless, nearly all cash advances from credit cards will automatically lock in an APR that is 3-4% higher than the standard purchase rate.

Therefore, while getting a cash advance may be necessary in certain situations, it pays to be aware that the most costly aspect of taking an advance from a credit card is the interest you will be required to pay on the money you borrow. Firstly, the interest you pay on a cash advance will be significantly higher than the ordinary interest rates you pay on credit card purchases or with other loan options. Secondly, the interest you pay on the money you borrow will begin accruing right on day one, from the time you withdraw the money, with zero grace period.

If you decide to take out a cash advance, you should plan to repay it as soon as possible. Having the option to take out a cash advance can be a great help in certain select situations but smart consumers should do their research and weigh all of their financial alternatives prior to taking out what could be a convenient but costly loan.

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