You know the feeling. You’re sure that you’re all set to make it to payday, and then your car starts crying out for gas. Just when that Klarna payment comes out. And your bank account drops to $7.
This is where cash advances come in. When you’re in a tight spot, a cash advance with 0% interest and no credit checks is a solid alternative to shady payday loans or overdraft fees that are designed to trap you in a debt cycle.
A cash advance can provide access to money to cover expenses until your next paycheck.
Many cash advance services are available with 0% interest, which makes it less likely for you to fall into a cycle of debt than, say, payday loans out here charging 600% interest.
But while cash advances can be a safer option, that doesn’t make you immune to falling into a debt cycle if you don’t use them consciously. So in this article, we’re gonna provide some money management advice for avoiding falling into a cycle of debt with cash advances. And, answering any questions you might have about falling into a debt cycle.
Why do people fall into a debt trap with payday loans?
When it comes to managing your money, we know that life can come at you fast. Financial emergencies push many people to seek a loan until payday. Unfortunately, high interest rates and fees on payday loans can trap people in a cycle of debt by making it difficult to pay off the loan in full.
Payday loan companies are in the business of making money from people in vulnerable financial situations, so their products are marketed as a quick and easy solution. But with high interest rates, a payday loan isn’t necessarily the safest option in the long term.
When someone takes out a payday loan, they typically have to repay the loan plus fees and interest on their next payday. However, the fees and interest rates can be super high, making it difficult for borrowers to pay off the loan in full.
In the US, four states have no interest-rate caps at all, and one state allows a 1,950% APR for a $100, 14-day loan. Ahem, Missouri.
This can lead to a cycle of borrowing and repayment, where borrowers take out new loans until payday to cover the repayment of their existing loans.
For example, if someone takes out a $500 payday loan with a $75 fee and a 15% interest rate, they would owe $650.
To calculate the total amount to be paid back, you add the interest charged and the fee:
Total amount = Principal + Interest + Fee
Total amount = $500 + $75 + $75
Total amount = $650
That’s your regular monthly expenses. Plus $650. At this point, many people look to take out further loans to cover their repayments.
Over time, the fees and interest rates can add up, making it super difficult for borrowers to pay off the loan in full. Leading to a cycle of debt that can be hard to break free from.
What are Cash Advances?
A cash advance provides you with cash until your next paycheck. They’re calculated against your credit limit or income. Cash advances are generally intended to be a temporary solution to financial emergencies.
Why do people fall into a cycle of debt with cash advances?
While some cash advances out there charge 0% interest (👋 Cleo), some cash advances come with much higher interest rates. Here’s why people fall into a cycle of debt with cash advances:
🕳️ High fees and interest rates
Some cash advances can come with high fees and interest rates that can make it difficult for users to pay them off in full.
🕳️ Overreliance on cash advances
Some users become over-reliant on cash advances as a way to cover their expenses. This can lead to a cycle of taking out cash advances from different services, to pay for previous cash advances.
🕳️ Lack of planning
As we learned from the COVID pandemic, life comes at you fast. Having no budget or emergency savings in place can make us more likely to be over-reliant on cash advance services. Obviously, it can be hard to find time to manage your finances when you're busy working and living on tight finances anyway. We cover some hacks for making this a little easier further down.
How to avoid falling into a cycle of debt with cash advances
As we mentioned at the start of the article, while Cleo has a cash advance service, she also comes with tons of free budgeting features and money managment advice. She’s there to help you not need cash advances in the future.
Here are some tips for using cash advances responsibly with Cleo:
1. Have a plan for repayment. If you have a solid budget, and a clear picture of your finances, you can factor in repayment to your next paycheck.
One of Cleo’s free features includes a personalized budget based on your incomings and expenses, so you can see exactly how much you spent on Uber last month. If you dare.
2. Make repayment work for you. With Cleo, you can set up reminders for bills due and repayments, and choose the repayment date that works for you.
3. Build an emergency fund. Having an emergency fund can help you avoid turning to cash advances in the first place. Aim to build up an emergency fund that can cover at least three to six months of living expenses.
With a personalized Cleo budget, you can make your savings automatic. If you have Auto-Saving turned on, Cleo will aim to move money to your Wallet once a week, on a Thursday. She will send you a notification on Wednesday if she thinks you can afford to put money in your Wallet, and the transfer will be made the following day unless you decline the saving.
There’s only one thing left to do…
Start romanticizing your finances 💖
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Big love. Cleo 💙