Everyone has money problems. That may seem like an exaggeration, but the numbers suggest otherwise. Around 77% of Americans experience financial anxiety, with over half feeling like their finances control them.
Even if you try your best to make do with whatever money you gather each month through your salary, unforeseen expenses like medical bills or car repairs can ruin your plans.
You may opt for short term loan solutions such as cash advances and payday loans to get through these situations. If you need help deciding which is better, check out this cash advance vs. payday loan breakdown.
What to Know About Payday Loans
A payday loan helps you borrow money for the short term. You get the money from a financial institution or a private lender who will extend a high-interest line of credit. Your credit influences the amount you can borrow.
It’s called a “payday loan” because, traditionally speaking, the amount of money you borrow is a portion of your monthly paycheck. The lender will ask you for proof of income and then you need to repay in 30 days or less.
The rates of payday loans come from the risk the lender takes on when giving this line of credit. Though they check your income, they perform a more in-depth check than banks to determine your loan repayment ability.
Payday loans can sometimes have high fees for late payments to mitigate the risks further.
What to Know About Payday Loans
Currently, only 37 states have specific statutes that specifically allow payday loans. The exact terms under which a payday loan can operate are greatly influenced by the area where you live, so you should check your local laws to understand all the terms.
Here are some examples of how states regulate payday loans:
- The maximum loan amount is $500, paid between 10 and 31 days. Interest cannot exceed 17.5% of the loan amount;
- The maximum amount you can borrow is $1000, and it cannot exceed 25% of your gross monthly income at the moment when the loan is made;
- The maximum loan amount is $500, paid in a maximum of 14 days. Interest cannot exceed 15% of the total loan;
- The maximum loan amount is $500, paid between at least seven days and no more than 30 days. The annual percentage rate may be, at most 36%.
- You can borrow between $50 and $550; the minimum loan term can be 14 days. Interest rates on the first $250 can increase to 15% of the principal. It is charged on loans of $250 to $400 and is limited to 13%. Charges on loans over $400 and $550 cannot exceed 10%.
Payday loans have a traditionally high APR, and not all states impose strict caps on them. The high percentage is because such loans don’t just consider the amount of money borrowed but also the time the loan needs to be paid back.
As a result, the APR is compounded, and a short-term loan paid in just a few days can calculate an “annual” rate.
These calculations can confuse borrowers, who often turn to payday loans in moments of high need. Moreover, they likely need to get the funds fast, so they need more time to weigh their options and understand how much they need to pay back the lender.
Most people opt to get emergency funds for unforeseen expenses. This is because they are easy to receive, and even people with bad credit may be eligible for quick cash, even if a bank would typically accept their request for a bad credit loan.
In truth, payday loans can be an effective way to get over an emergency expense. However, the borrower is responsible for fully understanding the loan terms and determining whether they can repay it.
Otherwise, borrowers may be in a vicious financial cycle where they accumulate debt.
What I Need to Know About Advance Payday Loan?
Cash advance apps are similar to payday loans, so most consumers need clarification. However, there are some significant differences to be aware of.
Here’s a fundamental breakdown of cash advances vs. payday loans:
On average, payloads are more expensive than cash advance apps. The latter may be slightly more costly regarding their APR, but the average APR of a payday loan is significantly higher.
- Payday loans allow you to acquire up to the state’s imposed limit if it exists. With cash advance apps, you can usually borrow between $100-$300. It encourages borrowing short amounts to use the service multiple times in case you need more money.
Cash advance apps can provide additional services and features, such as money management, which can help you repay the loan without affecting your credit or finances. With payday loans, such services are rare.
Payday loans are famous for approving loan requests on the same day you apply, something within just a few hours. With cash advance apps, approval usually takes a few days. Or you can also apply for instant payday loans.
Both payday lenders and cash advance apps will collect repayment directly from your bank account. But in the case of cash advance apps, borrowers may get some unique benefits.
For instance, if there isn’t enough money in your account to repay, a payday loan can incur an overdraft fee.
Cash advance apps will often review the bank account before making a withdrawal, and if the money isn’t there, they could provide the borrower with an extension.
How to Get Out of Payday Loans
If you’re now in payday loan debt, there are ways to get out of it, but rest assured, it will not be easy.
It requires planning and taking control of your finances. Here are simple steps you can follow:
Payday loans will take out the money from your bank account directly as you had permitted the company while accepting the loan.
If you’ve accumulated payday loan debt, stop the automatic payments by sending the lender a revocation of the authorization. It enables you to open a line of communication with your lender, and you can start negotiating with them.
Your lender wants their money back, and most will be willing to create a repayment plan to allow you to do it comfortably.
Contact your lender and ask them about a repayment plan, such as an extended payment plan (EPP). It may also help to be honest with your lender if you are experiencing financial hardships because of an illness or family emergency.
Again, most lenders will be willing to negotiate such terms with you because they want their money back. But, if yours is unwilling to do so, you may mention bankruptcy, which could help them budge.
If you declare bankruptcy, the lender will not get their money back, which could incentivize them to agree to your new terms.
Next, it’s time to plan how you’ll pay back your debt without straining your finances further.
Calculate how much money you make in a month and how much you must pay on “non-negotiable” expenses, such as food, housing, car payments, and bills.
However, take the major share of your balance amount and pay the minimum on all your debts. After your smallest amount is paid, you can move up the ladder until you’re down to just one monthly payment.
The snowball method has been found to be among the best strategies for paying off debt by many researchers.
To effectively pay off your debt, you should stop accumulating more. Taking out another payday loan or any other high-interest credit should be out of the question.
Budgets help you keep better track of the flow of money. To create an effective budget, you need to consider how much money is coming in and how much is going out.
When making a budget, you can review your expenses and see which are mandatory (such as food, school, and housing) and which ones you may let go of, such as subscription services you don’t use.
Then, you can also establish how much money you spend on things and how much you can save. Stick to your budget as strictly as possible.
How to Avoid Payday and Cash Advance Loans
The truth is that payday loans and cash advances are sometimes the only way people can cover some time-sensitive expenses.
Or are they?
Here are a few ways you may try to avoid these high-interest short-term loans:
Most people cannot cover an unexpected expense of $1,000 and are living paycheck to paycheck.
A common reason why this happens is that people need to learn how to manage their finances due to poor financial education effectively. Yet, around 75% of Americans say they manage their finances, and only 17% said they worked with a financial advisor.
An advisor may be even more helpful when you are in-depth or need to cover an unexpected expense. They can help you build a plan to navigate this situation without accumulating more debt or straining your current finances.
Many NGOs provide such services pro bono, which you can find with a quick Google search.
There are other ways to get a loan. For instance, a personal loan allows you to access extra money, only here you’re borrowing from a bank or credit union, which operates under much stricter laws.
These loans may take longer to approve but often have much friendlier terms and lower interest rates.
Few people don’t understand the frustration of having an unexpected expense they cannot cover. Sometimes it helps to find the courage to ask for financial help in these moments.
Whether from your friends, family, or a local organization like a church, these sources can give you the money you need to get back on your feet. If someone else is the person to accept charity, propose a repayment plan.
When Would It Be Efficient to Use A Payday Lender or Cash Advance Store?
Because of their high-interest rates and risk of accumulating more and more debt, most people assume payday loans and cash advance apps should always be avoided.
But is that true?
Well, it depends.
Truthfully, both payday loans and cash advance apps can be useful when you have an emergency expense you need to cover immediately.
When the clock is ticking, people often don’t have the luxury of looking for alternative financing methods or even reaching out to friends and family.
Payday loans and cash advance apps can be helpful. However, since the eligibility criteria are so relaxed, it’s important to consider a few things for yourself:
The payday lender and cash advance app will only consider your ability to repay a loan if you ask for proof of your income. So, consider this yourself before applying for a loan.
By the deadline, can you return the money in full and with the interest fees included? If the answer is no, it’s best to avoid these loans.
But if you are confident you can, you’re likely not at risk of accumulating additional debt and need this one-time support.
These lenders might have their terms and conditions. However, it is a competitive market, and lenders may come up with lower fees and additional benefits to attract more borrowers.
You should check out a few different lenders to see which can offer the terms that are the most beneficial to you.
If you cannot repay your loan, what backup plan do you have? Can you pick up a few extra shifts at work? Do you have a friend or family member who can loan you the money?
Even if you’re confident you can repay the payday loan by its deadline, having a backup plan can help you avoid paying extra fees and accumulating more debt.
Cash Advance Vs Payday Loan: Similarities
Cash advances and payday loans have some important things in common:
While some lenders may do a credit check, getting a payday loan or cash advance without one is much more common.
These are popular financing options for people with no or abysmal credit, who may otherwise be denied a loan from another financial institution such as a bank.
Both cash advances and payday loans must be repaid in a few weeks, a month at most. You will usually need to pay the money back by your next paycheck.
The money is often pulled from your account on the day or the next day after your employer adds the money to your bank account.
You can only borrow a little money with either of these loans. They are meant to borrow small amounts, usually a few hundred dollars. It’s rare for these lenders to offer $1000 loans, as most cap the loan amount at $500 or so.
Both cash advance and payday loan lenders allow you to take out consecutive loans even if you still need to pay your debt. It is a common strategy people do to pay outstanding loan debt.
While it could be helpful in a pinch, it can lead to debt accumulation if you are not careful. In addition, people may need help to escape debt if they repeatedly take out more loans to cover their debts.
Payday Loan Vs. Personal Loan: What’s the Difference?
If you’re exploring alternatives to payday loans, you might be looking into personal loans, which you can get from a bank.
A personal loan is a little more complicated to apply for and will take longer to approve as a bank analyzes your ability to repay the loan more in-depth.
But, like a payday loan, a personal loan doesn’t tell you what to spend your money on, so you can use it for unforeseen expenses.
Here are the key differences between a payday loan and a personal loan:
Payday loans are easier for people with poor or limited credit histories or financial hardships. Some payday lenders don’t even require you to have a bank account, as they can deposit your funds in a prepaid card account.
On the other hand, banks or institutions providing personal loans are more careful regarding who they approve.
If you are approved for a personal loan, the interest rate will be much lower when compared to payday loans. Moreover, banks usually only have a few hidden fees, making it even harder to repay your loan and get out of debt.
Though not all payday lenders are guilty of such practices, some companies are more predatory.
Personal loans will appear on your credit report because banks report all loans to a credit bureau. Payday loans, on the other hand, don’t do that.
But this doesn’t mean a personal loan will affect your credit. On the contrary, your credit score will improve if you make all the payments on time.
Payday loans are more expensive than personal loans. Even in an emergency, try to apply for a personal loan to see if you qualify. If you don’t, a payday loan may be necessary to cover your expenses.
Payday Loan Vs. Personal Loan: What’s the Difference?
What about cash advance loans and other types of loans, like personal loans? How can you determine which one is the right choice for you?
Consider the following factors:
The first question you should ask yourself is whether you can wait to get approved for a personal loan or need the money as soon as possible.
Personal loans you get from banks will take longer to approve. This is because the bank will run a more rigorous check on your credit history and try to determine your ability to pay back the loan.
It may take a while, primarily if you provide them with the correct documents when they ask.
With cash advances, approval is much faster, and that money could be in your account in just a couple of days, maybe less.
Cash advances can allow you to borrow a few hundred dollars to cover an unexpectedly high utility bill or other small expenses.
But if you need more money, you should get a personal loan. For example, if your home was damaged by water and you need thousands to pay for repairs, cash advances won’t pay that much, but personal loans will.
You can apply for a loan and get the money to fix your home at a lower interest rate.
Cash advance lenders don’t ask for your credit history like payday loans. Instead, they will only consider your monthly income to determine how much money to lend you.
A bank might only approve a personal loan if you have good credit, though they can do it if you have a well-paying and stable job.
Even with poor credit in the past, if the bank determines you can pay back the loan, they may approve it.
But if you’re in a rut and need more money coming in monthly, then a cash advance could be the better option for quick cash.
Alternatives to Advance Payday Loan
If you’re uncomfortable taking a payday loan or a cash advance, look for alternatives.
Here are some other types of financing options that could help:
If you own a home, tapping into its equity can help you get money to cover unexpected expenses at far better rates.
Home equity loans can help you consolidate debt, pay bills, and help you get more cash for other expenses like groceries. But, they do have to meet specific requirements, such as having good credit and a stable income.
Moreover, home equity loans mean the amount of money you get depends on the value of your home, which is put as collateral. It means that you must repay the loan to retain your house.
But because the banks usually thoroughly check a person’s ability to repay a loan, this is an unlikely situation. Still, use this option only if you need a larger loan.
You get a payroll advance directly from the employer. Then, you pay back the loan through your future salary. Usually, the employer will retain a percentage of your wage each month until the debt is paid.
It can be an excellent solution to get a few hundred dollars. However, not all employers offer payroll advances, so you must check.
You don’t necessarily have to get a loan to cover an unexpected expense. If the bill is manageable, you might wrap it up by selling personal items you don’t need.
There are many marketplaces where you can sell anything from clothes to furniture, old electronics, jewelry, and more. You can also advertise them on your social media accounts. It is a great option for people to quickly make some extra cash with minimal effort.
The uncomfortable truth is that you might struggle with your finances because there isn’t enough money every month. As a result, escaping debt or covering unforeseen expenses can be tricky since you need help to set money aside.
Starting a side hustle in your free time may help you get extra money coming your way each month. Consider your skills and how much time you can spend on the task.
Some tasks you can do to get extra money include:
- Babysitting
- Tutoring
- Shop for an elderly person
- Become a virtual assistant, etc.
FAQs Regarding Cash Advance Vs Payday Loan
You can get multiple payday loans. While most lenders might not approve a second or third one to the same borrower, many go to different lenders to get another.
Payday lenders often approve loans to people with outstanding debt.
Some databases collect information on payday loans, such as Veritec, but it’s only available in some states. The best way to find out if you have outstanding loans and how much is to ask the lender for this information.
You can also view your banking history to see which lender tries to pull money from your account.
The best way to pay off multiple payday loans is to consolidate them into one loan with a lower interest rate.
You can apply for a personal loan and use that money to cover your outstanding payday loans. But you’ll only have one monthly payment to your bank.
Cash advance apps and payday loans are similar because they provide small loan amounts that must be paid back in less than a month.
But, cash advance loans are often less expensive and may provide more support to help borrowers repay their loans.
Cash advances won’t directly impact your credit score, and your credit history will never mention you had one.
Your score will be affected if you can repay the cash advance or are on time with your payments.
The biggest issue with payday loans is their high-interest rate and fees for late payments.
If the borrower is not careful to ensure they have the money in their account to repay the loan and interest, this can lead to debt accumulation.
However, you can prevent this risk if you are diligent and plan effectively.
Conclusion: Is A Cash Advance The Same As A Payday Loan?
Cash advances and payday loans are risky, but so are the other types of loans available today.
The truth is they can both provide useful aid for a person struggling. If that’s you, you’ll first need to determine which short-term loans are better for you. Then, you can consider the significant differences between the two financing opportunities.
Payday loans provide higher loan amounts, but they are more expensive. On the other hand, cash Advances are cheaper, but you might need more than the loan limit to cover your expense.
Think carefully about your current situation, and see which type of loan suits you best. Remember, it’s imperative to avoid making your financial situation worse just by trying to cover one expense.
Do your homework and consider your long-term financial health before deciding between cash advances vs. payday loans.
