Have you ever found yourself in need of fast cash to cover a last-minute expense, but you don’t have enough in the bank to cover it?
A cash advance can help you get access to these much-needed funds. But, without having to go through all the hurdles that tend to come with traditional loans.
Let’s take a look at cash advances to help you determine if this is the appropriate loan type for you.
A cash advance is simply a short-term loan from a lender. If you qualify, you would be given a lump sum of money that would then need to be paid back in full by a certain date – plus interest.
There are a few variations of cash advances available, including the following:
With payday loans, you’re given an advance on your paycheque. You’ll be required to repay the loan by your next payday, plus interest. You can borrow up to $1,500 through payday loans, however, depending on the province you live in, you may only borrow up to 30% to 50% of your paycheque (up to $1,500).
Payday loans are easy to obtain with very few requirements for approval. These lenders do not require credit checks and often simply require you to have enough income to cover the loan payment. Moreover, applications are quick to complete and funding is provided within 15 minutes to 24 hours after approval. However, in return for such fast access to cash, the interest rates charged are extremely high.
Cash advances may also involve withdrawing a certain amount of money from your credit card. Credit card cash advances typically come with very high-interest rates, but they are attractive because they can provide immediate funding when the need arises.
A merchant cash advance is not technically a loan. Instead, it’s an advance based on a business’s future credit card sales. In other words, the business is selling a percentage of future credit card sales to gain access to capital immediately.
If you run a business and most of your revenue comes from credit card transactions, you may want to consider a merchant cash advance. The advanced funds will be available relatively quickly.
Depending on the type of cash advance you choose, the way it works will vary.
Payday loans work by having a certain amount of money supplied to the borrower from a lender. These types of loans are rather easy to get approved for. Bad credit borrowers often seek out these types of loans because these lenders don’t typically check credit scores.
All that is typically required is that the borrower is of the legal age of majority (18 years), is a Canadian resident, and can prove that they have a steady flow of income.
Once this information is verified, the lender will supply the requested loan amount. The loan must then be paid within a short time frame, usually within two weeks to a month, or when the borrower’s next paycheck comes in, hence the name “payday loans.” Usually, these loans must be fully repaid in one lump sum rather than in installments.
A credit card cash advance is the more popular type of cash advance and involves accessing cash through a credit card. If you already have a credit card, you may be able to access fast cash by withdrawing it through an ATM or bank teller up to your cash advance limit, which may be lower than your regular credit limit for purchases.
Credit card interest rates are already high, but the rates charged on cash advances from a credit card are even higher. Further, the interest will start accruing right away without any grace period. You’ll also be charged a cash advance fee, which usually is $3-$5 per advance or 3%-5% of the cash advance.
It’s also important to remember that a credit card cash advance also carries a separate balance from your credit card expenditures, but you might be able to apply your monthly payment to both balances.
Every day, a certain percentage of your business’s daily credit card receipts are withheld to repay the merchant cash advance, which is known as the “holdback.” This will continue until the full advance is repaid.
Instead of paying a specific interest rate, as is the case with the typical loan, a merchant cash advance does not charge an APR. Instead, repayments are based on a ‘factor rate‘ of daily sales, which is an amount multiplied by the initial loan amount. Generally speaking, factor rates range between 1.1 and 1.5, depending on the agreement.
For instance, if you borrow $10,000 at a factor rate of 1.2, you would have to pay back $12,000 ($10,000 x 1.2), plus any applicable fees.
The repayment is directly influenced by your business’ daily transactions. The more credit card transactions your business does, the faster you can pay back the advance since repayment is based on a portion of the merchant account’s daily balance. On the other hand, if these transactions are lower at any point, the withdrawal from the account will also be less.
In this way, repaying the advance is easier, since it’s dependent on how busy or slow your business is.
With a cash advance, you can’t just arbitrarily take out as much money as you want. Much like any other type of loan, there is a limit to how much you can take out.
With a credit card cash advance, your limit can be your normal credit limit on your card, or it may be another limit set by the credit card company, which will likely be lower than your typical credit limit on your card for purchases.
For short-term cash advances or payday loans, the borrowers can get up to $1,000 to $1,500, depending on the lender and province they live in. Each province has their own rules and regulations for payday lenders. Some provinces limit the borrowing amount to 30% to 50% of the borrower’s monthly income, up to $1,500.
The amount you can borrow through a merchant cash advance depends on your business financials. However, generally, you can borrow anywhere from a few thousand to a couple hundred thousand.
There are a variety of expenses that come with these loan types, including the following:
Before using a cash advance to get quick access to funds, consider the perks and drawbacks;
Yes, a cash advance can affect your credit if you fail to use it responsibly. Want to know what your credit score is before taking on debt? CompareHub by Loans Canada lets you check your credit score for free.
In the case of a credit card cash advance. Your credit score could suffer if you max out your credit limit. Failing to make high-enough payments every month to bring your balance back down can also negatively affect your scores.
By maxing out your credit card, you’ll be increasing your credit utilization ratio. This is your credit card balance compared to your credit limit. The more you charge, the higher your credit utilization ratio will be, which can pull your credit score down.
In terms of a payday loan or short-term cash advance, your credit score will only suffer if you fail to make your payments on time. That said, payday lenders don’t typically report to the credit bureaus, so your credit score won’t necessarily be affected if you don’t pay.
However, if the payday lender wants their money, they could send a collection agency after you. If this happens, it could be reported to the credit bureaus and therefore be noted on your credit report. In this case, your credit score could suffer.
Like a payday lender, merchant cash advance lenders do not report payments to the credit bureau, as an MCA is considered an advance and not a loan. While missed payments won’t be reported to the credit bureaus, your lender could sell your debt to a collection agency, which will be noted in your credit report. This, in turn, could negatively affect your credit.
You can use the money you obtain from a cash advance to cover any number of expenses, including any of the following:
The list is seemingly endless. That said, it’s important that you think hard about what you will be using the money for. Since you are committing to a loan that you must pay back in full by a specific due date, plus interest and fees. You want to make sure that the reason for the cash advance is a valid one. If you fail to make your payments, your credit score can suffer if the lender reports failed payments to the credit bureaus.
Aside from a cash advance, there are other options to consider to get your hands on fast cash:
If you can wait a few more days to get access to borrowed funds to cover a pressing expense, consider a personal loan instead of a cash advance. Personal loans are less expensive because they typically come with lower interest rates, and you can borrow much higher amounts, upwards of $50,000.
Rather than withdrawing cash from your credit card, consider putting the expense on the card itself. Many bills can now be paid using a credit card, including utility bills, phone bills, and others. This will help you avoid the higher interest rates and fees that come with credit card cash advances.
If you’re struggling to continue meeting your financial obligations. Consider negotiating a different payment plan or lower rate with your creditor. Many lenders are willing to defer loan payments or modify your payment plan. Especially, if you’ve been responsible with your payments.
Cash advances can certainly come in very handy. Particularly when you need money right away to cover a pressing expense. The cash can be obtained right away with few hurdles in the way. However, these types of loans tend to come with some hefty charges. Typically, in the form of sky-high interest rates and other fees. As such, be sure that you are using the money for a valid reason. And that you can repay the loan amount accordingly.
Rating of 4/5 based on 7 votes.
Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.
Save time and money with Loans Canada. Research and compare lenders before you apply. Share your experiences with Canada's top lenders.
Loans Canada is pleased to announce it placed No. 131 on the 2022 Report on Business ranking of Canada’s Top Growing Companies.
Great unsecured credit card for customers currently in, or recently discharged from, a consumer proposal or bankruptcy
Earn an average 5%¹ cash back at thousands of partners and at least 0.5%² cashback guaranteed.
KOHO’s Credit Building Program helps you build a better credit history with easy to manage payments for just $10/month.
All consultations and conversations with Loans Canada and its partners are confidential and risk-free. Speak with a trusted specialist today and see how we can help you achieve your financial goals faster. Loans Canada and its partners will never ask you for an upfront fee, deposit or insurance payments on a loan. Loans Canada is not a mortgage broker and does not arrange mortgage loans or any other type of financial service.
When you apply for a Loans Canada service, our website simply refers your request to qualified third party providers who can assist you with your search. Loans Canada may receive compensation from the offers shown on its website.
Only provide your information to trusted sources and be aware of online phishing scams and the risks associated with them, including identity theft and financial loss. Nothing on this website constitutes professional and/or financial advice.
