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Sunday, December 3, 2023

Understanding the Risks of Cash Advancement: What You Need to Know

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In most cases, if you are not familiar with the terms and conditions involved in obtaining cash advancement loans, you might be surprised at how much you have to pay back. Although a cash advance could appear as a seamless means through which you can get cash faster, you might later have to spend more on interest and fees than you ever bargained for. In order to help you make the right decision financially, we are going to help you in understanding the risks of cash advancement in the course of this article. 

The process of taking a cash advancement loan means you are borrowing cash in defiance of the line of credit on your credit card. This is usually short term and is given to you by your credit card provider. Simply put, cash advancement loans can not be taken on a long term basis. It is important for you to note this when talking about the risk of cash advancement. However, requesting cash advancement loans should be fully avoided, and only used when it’s really necessary. 

Cash advance terms and fees

To fully understand the risks of cash advancement, we will need to have a specific look at the terms and fees involved. The process of getting cash advancement loans are simple and easy, however they usually come with some higher interest rate when compared with their advantages. Make sure you always carry out thorough investigations on the terms and conditions associated with the loan advancement. This will help you avoid being caught unawares as a result of not preparing for it. 

There is no time of grace for repayment

When you get a cash advancement loan, you are not given a time of grace to pay back what you owe. Simply out, the money starts to incur the interest right from the day you get the cash advancement loan. You will be charged for the interest from the very first day you get the money. It is a different scenario when you make use of your card to pay for something. In this case, the credit card provider gives you a time of grace, this is usually for a minimum of 21 days. You can pay back within this period given to you without incurring any interest on your balance. 

Cash Advance Annual Percentage Rate

As mentioned above, when you get a cash advancement loan, the interest rates are usually higher than when you use your credit card to pay for a product or balance transfers. This fee will be paid in addition to the total amount of money itself. When this is cumulated, it results in a higher annual percentage rate than when you make a purchase. 

Bank or Automated Teller Machine (ATM) fee 

There is always a fee attached to getting a cash advancement loan regardless of where you get it. Banks will add their fees and so will automated teller machines. This is noteworthy.

Cash Advance Fee

Most credit card providers will request a cash advancement fee on every loan you ask for. This fee is usually between the range of 3%-5% of the total amount of money collected. So each time you request for a cash advance, expect an interest fee of up to 5%. Let us see for instance, a #50,000 cash advance which has a 5% interest fee, will cost you #2.50. 

Risks of Cash Advancement Loans

In no particular order, these are some of the risks of cash advancement loans that you should consider before you dive into that pool. 

Risk number one

As mentioned earlier, It is not free to get a cash advancement loan from your credit card. There is a fee automatically attached as soon as you get it and this fee varies depending on the card provider. Generally you may be required to pay up to 5% interest on the amount borrowed. This could in turn lead to more setbacks for you financially.

Risk number two

Cash advancement loans, when frequently used, may debar a person from getting an increase in credit limit. It can be seen as a red flag by creditors. This will then make the borrower as a person who is not stable financially. The creditor may not want to keep your account going with them. They can even go the extra mile of shutting down your account without providing you with any prior information.

Risk number three

Frequent requests for cash advancement loans may have an adverse consequence on your credit utilization rate. When you withdraw a weighty amount of money for cash advance, there could be an increase in your utilization rate. This will then lead to a drop in your credit score. In general, organizations who give out loans search for a 30% maximum utilization rate before agreeing to provide a new advance or increased credit limit. 

Risk number four

When you request a cash advancement loan, the interest starts to read immediately you get the cash. This is not the case when you use your credit card to make a purchase. In the case of purchase, you are given a time of grace to pay the money. This grace period could be up to 30 days, and as long as you are able to meet up, you will not incur any interest on the payment. The unfortunate part is that the interest fee on the cash advancement loan is way higher than when you buy or pay for a product or service. Majority of times, you get up to 25% more. 

Other ways to source for cash instead of cash advancement loans

Family and Friends

This might not be the easiest thing to do, but it’s most advisable. You are able to pay at your own pace and not incur exorbitant interest rate on the money you borrowed. However, you should try to pay back as soon as you can, within the agreed time. If you do not, you may lose their trust and loyalty.

Selling Used items

Another preferable option is that you can also get cash from selling those belongings that you do not make use of any more. It could be your household equipment, jewelry or even your sports materials. 

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