Maybe you’re hit with an unexpected vet bill. Or your car starts crying out for gas right before payday. Whatever the case, when you're in a financial pinch and need cash quickly, you might find yourself looking to take out cash advances or payday loans.
While both can provide fast access to cash, they are not the same thing. In this blog post, we'll discuss the differences between a cash advance and a payday loan, so you can figure out which is right for you.
What is a payday loan?
A payday loan is a short-term loan that is typically due on the borrower's next payday. It is designed to provide immediate cash to individuals who are in urgent need of funds. These loans are often used to cover unexpected expenses, such as medical bills or car repairs.
One of the key features of a payday loan is the speed at which you can get your money. Unlike traditional bank loans, payday loans are usually processed quickly, with funds being deposited into the borrower's bank account within hours or even minutes of approval.
However, payday loans typically come with high interest rates and fees. In some states, it’s legal for lenders to charge 600% interest on payday loans. Yikes.
So it's super important to carefully read the terms and conditions before taking out a payday loan and make sure that you’ll be able to repay the loan in full by the due date.
When it comes to payday loans, it's also really important to understand the potential risks that come with this type of borrowing. While payday loans can be a quick solution to financial emergencies, they can also lead to a cycle of debt if not managed properly.
Before applying for a payday loan, it's recommended to explore other alternatives, such as borrowing from friends or family, negotiating with creditors, or taking out a cash advance.
It’s not just the financial implications. It's worth considering the emotional and psychological impact of relying on payday loans. The stress and anxiety of having heavy interest hanging over you can take a toll on your mental well-being.
The Lowdown: Features of a payday loan
1. A payday loan is a type of short-term borrowing that is typically due on the borrower's next payday. This means that the borrower is expected to repay the loan within a short period of time, usually within a few weeks or months.
2. One of the main advantages of payday loans is the speed at which you can access funds. In many cases, borrowers can expect to receive the loan within hours or even minutes after their application is approved.
3. It is important to note that payday loans often come with high-interest rates and fees. Due to the short-term nature of these loans and the quick access to funds they provide, lenders charge higher interest rates to compensate for the perceived risk. You’ll want to carefully consider the cost of borrowing and make sure you can afford to repay the true cost of the loan (including interest) on time to avoid getting hit by excessive interest and fees.
4. Payday loans can result in additional fees and a negative impact on your credit score if not repaid on time. Late or missed payments on payday loans can have a negative impact on the borrower's credit score, making it harder for them to access credit in the future.
Overall, payday loans can offer a quick solution for people in need of immediate cash. However, it’s really important for borrowers to carefully consider the terms and conditions of these loans and make sure they can repay them on time.
An alternative: What is a cash advance?
If you're looking for an alternative to payday loans, you could consider a cash advance.
A cash advance is a quick spot that is calculated against your credit limit or income. So one way of looking at it is that you’re getting your next paycheck, early.
Cash advances typically offer less than payday loans (generally hundreds rather than thousands of dollars). But many cash advances are available with 0% interest, meaning repayment may be more manageable.
In terms of eligibility, some cash advance services will take into account your credit history. Some will require employment verification. Others will just look at factors like your income to calculate your eligibility. Because of this, cash advances can be a more accessible option to freelancers and those with poor credit.
Whatever the case, you should still always use cash advances responsibly, read the terms and conditions thoroughly before taking out a cash advance, and make a plan for repayment.
Some cash advances come with fees. If you get your cash advance from a cash advance app, there’ll likely be a subscription charge or a same-day fee to access your cash advance. Generally, monthly subscription fees are less than $10, and same-day fees are less than $5.
The Lowdown: Features of a Cash Advance
1. While some come with interest, many cash advances are available with 0% interest. Whatever the case, make sure you thoroughly read the terms and conditions, account for any extra fees, and make a plan to repay the true cost.
2. Some cash advances are available with no interest, no credit checks and no employment verification required, making them a more accessible alternative to payday loans.
3. Cash advances are designed for speedy access. If you’re eligible, many are available within a few business days, or offer an advance fee to receive your money same-day
4. Cash advances typically give smaller amounts (hundreds rather than thousands of dollars), which can cover the cost of emergency expenses like a car repair. Remember to only use cash advances in emergencies, to avoid getting into a cash advance cycle
FYI, Cleo offers a cash advance of up to $250.* No credit checks. No interest. No employment verification required.
And because Cleo’s the app that wants to help you eventually not need a cash advance, you get access to Cleo’s free AI budgeting features as soon as you download the app (which you’ll need to do to access the cash advance).
If you want to know more, check out our step-by-step guide to getting a cash advance with Cleo.
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*Cleo Plus is our subscription service, which offers eligible users cashback on your money, information on your credit score, and access to cash advances (“Cash Advance”). Advance amounts will vary based on eligibility. If you don’t want to subscribe, you can also apply for cash advance by contacting our customer service at email@example.com. To learn more about eligibility, repayment, and overall terms, please visit: meetcleo.com/terms.
Cleo could spot you up to $250.* There's 0% interest, and we never require credit checks or employment verification.