Alternatives To Cash Advances

In a pinch, a cash advance can be a tempting way to quickly refill a wallet. No application, no credit check, no chance of rejection, no wait. And while cash via an existing credit account can be particularly appealing, there are a couple big catches.

The biggest drawback to a cash advance is that in exchange for the convenience of a quick withdrawal, you’ll pay high fees and interest. Cash advances should only be used as a short-term solution when you are confident in your ability to pay the money back quickly.

Most credit card users will find cash advances limited to 20% to 30% of their credit limit, which may not be enough to fund large expenses. Check your card’s terms and conditions to see what your cash advance limit is. What other options do you have for cash in a pinch? We’ve compiled a guide to cash-advance alternatives and how to evaluate your options when you need cash fast.

A Personal Loan

Sure—personal loans may involve tedious paperwork and a longer wait for cash in hand, disadvantages you can avoid with a cash advance. But don’t seek a cash advance until you’ve already ruled out a personal loan, which can be more cost-effective than a cash advance and worth the time it takes to apply, depending on the situation.

While interest rates on personal loans can be hefty, they are usually lower than those applied to cash advances and may come without the same massive fees.

Some personal loans are “secured,” or backed by collateral from the borrower, which represents a lesser risk to the lender and allows more money to be lent at a lower interest rate. Other loans are “unsecured,” which usually demand a higher credit score to obtain. Payment amounts for “variable rate” loans can change over time, while payments for loans with “fixed rates” will not.

If you do go the personal loan route, be sure to read the fine print so you don’t incur unexpected expenses. For instance, some loans may charge you a prepayment penalty or have other hidden fees.

Borrowing From Your Retirement Fund

Emergency cash may be borrowed from a 401(k). Like a cash advance, this allows for borrowing with greater ease and flexibility. Borrowers need only look up the loans page on the website administering the 401(k) and choose a loan size, for which the only limit is $50,000 or half of the account total (whichever is lowest). The loan can be repaid with automatic payroll deductions, similar to the way in which the 401(k) is funded.

Unlike a personal loan, the available money still belongs to the account holder, meaning no evaluation of credit history is needed to borrow because the lender and borrower are the same person. Some view this process as simply accessing one’s own savings without being taxed.

Unlike some forms of savings, a 401(k) is not a liquid asset, and parameters exist for how the loan must be paid back. Borrowers usually face a five-year limit, though paying the loan off sooner if possible can be advantageous. An interest rate—typically one or two points more than the current prime interest rate—will be automatically calculated for the loan. Fortunately, for the borrower, these interest payments are deposited back into the 401(k).

Like a cash advance, there can be a steep price for the convenience of borrowing against a retirement account. First and foremost, a 401(k) is a cushion to create financial security during one’s later years—and depleting it earlier than expected carries setbacks, even once restored. For one, some borrowers don’t contribute as much, if anything at all, to their retirement plan while the 401(k) loan is being repaid by payroll deductions. This effect is compounded by how it reduces or forfeits an employer’s matching contributions. Even for financially responsible people, this could have a major impact on retirement and later-life planning.

Consequences can also pile up if things don’t go according to plan. Defaulting incurs a 10% penalty on all outstanding funds and increases one’s tax burden, as the loan turns into a “withdrawal” and the outstanding balance is considered taxable income. This won’t directly affect one’s credit, but it’s not difficult to imagine how the resulting financial impact can contribute to issues that do. If the borrower leaves or loses a job while paying the loan back, they may have to pay the entire balance immediately or within a short period of time to avoid default.

Taking a loan from an IRA is prohibited. A withdrawal is not, however, and some people simply bite the bullet and draw from an IRA or a 401(k) for emergency funds. Roth IRAs allow early withdrawals, meaning before age 59½, without any penalties or taxes for certain expenses like college tuition and first-time home purchases. For a withdrawal from a traditional IRA or 401(k), in most cases a 10% penalty is paid, and taxes are incurred as well when withdrawing from a 401(k).

Paying Bills With Your Credit Card

There are plenty of reasons to be wary of heavy spending with credit cards. And some people consider the use of a credit card for recurring monthly expenses to be a sign of financial trouble. For those carrying a balance or struggling to make payments on time, using more credit than the recommended 30% of your limit can have the same risks as taking out a tough-to-repay loan. Even if the balance is paid in full and on time every month, excessive charges can hurt one’s credit score by negatively affecting a credit utilization ratio—one key factor in how credit bureaus calculate a credit score.

There are also strong arguments for increasing one’s credit use, particularly for those with strong financial habits and good credit history. Within reason, those who use cash or an ACH transfer to pay bills might consider charging those bills to a credit card instead. Doing so will spare the high interest rates and fees involved in obtaining a cash advance and may even free up other cash previously used to pay bills.

Convenience fees may be charged when using a credit card for certain recurring expenses by vendors passing on transaction fees to its customers. These extra charges tend to be calculated as a percentage of the total payment and can add up quickly, so proceed with caution. Common examples of bills requiring extra fees and/or additional services to pay by credit card include rent, taxes and student loans.

Many other recurring bills can be easily charged to a credit card with no strings attached and are an easy way of accessing credit without a cash advance. Common examples of these include bills for internet, cable, certain utilities and cellphones. Of course, paying with a credit card rewards the user with greater opportunity to build credit and may often contribute to point or cash reward totals granted by the card issuer.

Bill Payment Service

For those expenses like rent, taxes and student loans that typically can’t be paid directly (or without additional fees) with a credit card, bill payment services such as the U.S company Plastiq or its Canadian alternative PaySimply offer an alternative to paying with cash or check. Check your credit card’s terms to make sure your card is compatible with third-party services like these.

When a credit card is swiped, the merchant usually pays about 1.5% to 3.5% of the purchase’s value as a processing fee to the customer’s credit card company. In industries where credit card use is the norm, like retail shops and restaurants, merchants usually adjust prices to pass this cost along to the consumer. Bill collectors like utility companies, municipal governments, universities and landlords don’t have nearly as strong an incentive to accept credit cards—only the disincentive of substantial merchant fees on large payments.

A bill payment service acts as an intermediary in these transactions. The customer pays the bill payment service with a credit card, along with a fee that offsets the credit card company’s merchant processing fee—Plastiq, for example, charges 2.95%. The bill payment service then pays the recipient in the recipient’s preferred form.

As when a credit card can be used to cover bills directly, this arrangement can help customers avoid a costly cash advance. By using a credit card, the customer can earn credit card rewards or early pay discounts that might offset the bill payment service’s fee. Being able to use a credit card can also buy a little extra time if a bill is due before your next paycheck. But interest fees could quickly turn things sour if the resulting card charges aren’t paid on time on time. Using credit cards to bridge gaps like this is not something we recommend doing long-term.

Credit Card Loan Programs

A loan from a credit card company, if available, extends credit at a lower cost to the customer than a cash advance usually does. The consumer also avoids the need to apply and face a credit check as one would with a traditional loan. Examples of these programs include My Chase Plan, My Chase Loan, Citi Flex Pay and Amex Pay It® Plan It®.

These services aren’t necessarily advertised as loans, even though they involve the extension of a specific amount of credit. Instead, they are often presented as ways to finance specific purchases through existing available credit.

Some programs will deposit money (to be used for anything) directly into the customer’s bank account. Others tie the loan to a specific purchase, either by setting up the loan prepurchase or allowing customers to essentially finance an already-made credit card purchase retroactively.

Buy Now, Pay Later Services

For those who like the credit card loan program option but don’t have a card offering such a service, a buy now pay later service (BNPL) might also fit the bill. These services allow customers to essentially finance purchases from specific merchants over time. Typical timelines for repayment range from a month to a year or more. Klarna, Affirm and Afterpay offer popular examples.

BNPL is becoming increasingly popular, in part because some companies don’t charge any interest when the plans are short-term and paid on time. Others extend credit for longer at a lower interest rate than would be the case with a personal loan or carrying credit card debt.

In either case, BNPL is usually a more cost-efficient way than acquiring a cash advance to make a notable purchase. It doesn’t offer the same flexibility as a cash advance or personal loan and can lead to poor spending habits but can be a much better choice for borrowers with specific purchases in mind.

Bottom Line

It’s important to be wary of the potential consequences anytime you’re borrowing money for an immediate need. The old adage that you can have something done “good, fast or cheap—pick two” holds true here, too. Cash advances, while helpful, are notorious for hurting short-sighted borrowers with high interest rates and other fees. Alternatives present a range of levels of risk vs. reward—many are either safer bets or less expensive to the borrower but none are a perfect panacea for those cash-strapped times. Research your options thoroughly, including reading the fine print, before making your choice.