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Credit Card Cash Advance Vs. Payday Loan: What’s The Difference?

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When you need fast cash urgently and there is no one to borrow from, two solutions may come to your mind: a quick payday loan or a credit card cash advance. These two products have many differences that not all of our fellow citizens know about. Financial experts made a comparative “credit cards or payday loans” analysis.

What to Know About Payday Loans

A payday loan is usually a short-term, small-dollar (generally up to $1,000) loan that is typically due on your next payday. In Michigan, payday loans are available online or through storefront payday lenders.

This type of lending has become very popular in recent years. Payday loans can be issued very quickly and be spent on literally anything. There is no collateral or paperwork involved – as a rule, the person only needs proof of identity and income. The advantages of payday loans are listed below.

What Are the Benefits of a Payday Loan?

  • Eligibility criteria are simpler than those of a credit card. Microfinance companies do not impose strict requirements on borrowers, and only a government-issued ID is enough to apply and receive money.
  • Online lenders are less likely to decline loans. They are willing to work with people who usually get rejected by banks – for example, housewives, students or the unemployed. There are even payday loans for retired. Also, many companies offer payday loans for bad credit – small loans will help improve poor credit history and get better offers. At the same time, very few companies offer credit cards for bad credit.
  • Many companies issue payday loans online. You can get money from literally any place, while at home or at work. You only need a device with stable access to the Internet. Bank branches or their representatives are not available in all areas.
  • Loans are issued in various convenient ways. You can receive the money transferred to your bank account or in cash. You can repay the debt using a bank account or e-wallet, via ATMs, in cash, and in many other ways.
  • It won’t take long to get a payday loan. It often takes a few minutes for a lender to process your application and make a decision. If approved, you can expect to receive the money as soon as the same day. Some online lenders operate in automatic mode – this allows them to accept applications around the clock and seven days a week. This attracts thousands of Michigan residents who need fast cash for holidays.
  • If you have difficulty repaying the debt on time, you can request a loan extension. It is a mutual agreement between a lender and a borrower that extends the maturity date on a borrower’s loan.

What Are the Downsides of a Payday Loan?

  • The most obvious downside is higher interest rates. Due to small amounts and terms, as well as the risk of lending money to a person with bad credit, interest on loans is often much higher than on credit cards. Some lenders offer interest-free loans, but they are only available to new clients.
  • It is not possible to get a large loan. An average payday loan amount is usually $500. Typically, you cannot borrow more than $1,000 for 2-3 weeks. If you are contacting the company for the first time, then the available limit may be smaller. There are companies that issue large loans for long periods, but such offers are only available to regular customers.
  • Microfinance companies may be less reliable than banks. There are scammers who can steal money or personal data of borrowers, or leave clients with very large debts. Determining the reliability of a payday loan lender is sometimes quite difficult but possible. To find a reliable lender, you can apply with our online portal. We have an extensive network or licensed lenders that can be trusted.

What to Know About Credit Card Cash Advance

A credit card cash advance is a withdrawal of cash from your credit card account. In fact, you’re borrowing money against your credit card to put cash in your pocket. However, taking a credit card cash advance involves costs. And, in some cases, you can withdraw the limited amount.

Applying for a credit card is quite easy. If you receive paycheck as a direct deposit, then a credit card will be issued to you without providing any information. The amount of the credit limit will be calculated based on the average monthly transfers to the pay card.

What Are the Benefits of a Credit Card Cash Advance?

  • Interest rates on credit cards tend to be higher than on personal loans but always lower than on payday loans. Usually, they are up to 20-30% per annum. If you are a regular customer or can confirm your reliability, then the bank will reduce interest for you.
  • The credit card has a grace period during which no interest is charged. If you have time to pay off the debt during this period, you will be able to use the card without overpayments. You will only have to pay for service and SMS notifications. The bank can extend the grace period upon full repayment of the debt.
  • Credit card revolving credit. Revolving credit is a line of credit that remains available over time, even if you pay the full balance. This is convenient for those who borrow money often – it is easier to get one credit card than several loans.
  • The credit limit may be higher than the loan amount. It depends on the income of the borrower and is often equal to twice its amount. If you use a credit card often, the bank will be able to increase the available limit.
  • A credit card has more flexible repayment terms than a loan. Usually, it is enough to make the minimum payment every month – a part of the debt amount plus accrued interest. In any case, you can repay the entire debt amount or most of it, including ahead of schedule, without any restrictions.
  • Credit cards often offer bonus programs for their holders: cashback or bonuses. Bank partners have discount programs. High-status cards (gold, platinum, or premium) often have benefit programs (such as personal banking or travel insurance)
  • A credit card is easier to use abroad. You can use it to pay for expenses in any currency – the money will be exchanged automatically. Some banks issue bad credit credit cards with a foreign currency limit. Payday loans can only be issued in dollars – foreign currency loans are prohibited by law.
  • There are also installment credit cards that allow you to buy goods and services in interest-free installments. Such purchases are redeemed in installments within a certain period. The interest is paid by the store where you paid with the card.

What Are the Downsides of a Credit Card?

  • When applying for a credit card, the borrower may be subject to fairly strict requirements. This may be a certain age, place of residence, length of employment and income, and credit history. To get a credit card, you usually must be 21 or older, have a verifiable income source, and provide a SSN.
  • Credit cards have restrictions on cash withdrawals and transfers. In most cases, such transactions are subject to a high commission and the grace period is terminated. Only a few banks offer credit cards for cash withdrawals.
  • Issuing a credit card can take a long time. Depending on the bank, it can take from 1 to 7 business days. Some organizations offer instant credit cards, but the functionality of such offers is often limited compared to standard ones.
  • Sometimes a bank may close a credit card if it has not been used for a long time. Therefore, it is more difficult to use it as a backup payment instrument.
  • To apply for a credit card, you must contact a bank branch. The choice of offers is limited to credit institutions that operate in your area. Some banks offer home delivery of ready-made cards.

The Costs Associated with Payday Loans Compared to Credit Cards

Financial Conduct Authority FCA confirms price cap rules for payday lenders. The total cost cap will be 100% of the total amount borrowed, applying to all interest, fees and charges.

Many state laws set a maximum amount for payday loan fees ranging from $10 to $30 for every $100 you borrow. A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400%. By comparison, APRs on credit cards can range from about 12% to about 30%.

You may qualify for zero percent credit cards meaning you will not pay more than you borrowed while the deal is in place.

Many credit cards offer 0% balance transfers. A 0% balance transfer is when you shift debt to a card offering a promotional 0% interest rate on the amount that you transfer.

However, most of these deals have a balance transfer fee. A balance transfer fee is a charge imposed by a lender to transfer existing debt over from another institution.

Is a Credit Card Cheaper in Comparison to a Payday Loan?

Considering monthly interest rates alone, credit cards are cheaper than payday loans.

However, if you are borrowing money using your credit card you need to be responsible. A credit card can become very expensive if you do not pay what you owe in time.

Interest gets added monthly. Which means your balance increases and interest rates rise if you avoid making repayments.

Payday loans have certain limits, ensuring you never pay off more than double what you borrowed. Currently, there are no limits to credit card costs.

The amount of debt you own could continue to grow until you reach your credit limit. Which may then continue to rise.

If you continue missing payments, you could find yourself in a debt trap.

Credit Card Cash Advance or Payday Loan: What is the Key Difference?

The process of getting a credit card cash advance is more complicated, and this is the main difference from getting a payday loan. In this case, the client receives a card with a certain limit of funds that can be spent on any needs. You undertake to repay the debt within the specified time and pay monthly payments depending on the amount of funds spent and the interest charged by the credit card issuer.

It is worth saying that the interest rate on credit cards is more profitable than that of payday loans. However, to get a credit card, you will have to work hard.

Firstly, to apply for a credit card, you will need to provide a lot of documents that serve as proof of your solvency. The size of the credit limit depends on it. The company processes the request within several days. Very few banks issue instant credit cards for bad credit, so the process of receiving money may be delayed (5 days to 2 weeks). Credit history and existing loans play a huge role: banks put forward certain requirements for customers, so they can refuse to lend you money if you have outstanding debts, a bad credit score, or if you do not have a permanent income. At the same time, payday loans are also known as bad credit loans, and you can get approved if your credit score is far from perfect

While payday loans for bad credit may seem like a good way to finance home improvement or medical bills, they may drive you into a debt trap if you do not make payments on time. The Consumer Financial Protection Bureau (CFPB) has authority to enforce against predatory lenders. They can take legal action against borrowers who fail to fulfill their credit debt obligations. CFPB also has the right to rescind loans within three years.

The table below demonstrates the key differences between credit cards and payday loans:

Payday Loans Credit Cards
Pay out Quickly Slowly
Interest rate Higher Lower
Grace period No Yes
Availability around the clock Yes No
Application Easy More difficult
Cash withdrawal Yes Not recommended
Bad credit Accepted Wary
Money at hand No Yes
Revolving limit No Yes
Bonuses No Yes
Commission No Yes

Payday Loans vs Credit Cards: Which is Better?

The answer depends on how often and for what purpose you borrowed money. A credit card is right for you if:

  • You often need to borrow money in non-cash form;
  • You use borrowed money primarily to pay for purchases;
  • You can observe a grace period to use a credit card without interest;
  • You need a convenient tool for shopping abroad or in foreign online stores;
  • You need a backup source of money for emergencies.

In other situations, a payday loan will be more profitable:

  • If borrowings are required infrequently and in small amounts;
  • If you need a few hundred dollars for urgent purposes immediately;
  • If you get rejected by banks for any reason – for example, due to bad credit;
  • If you need cash, it is easier to get it from an online lender than to withdraw it from a credit card;
  • If it is difficult to use banking services in your area (for example, due to a small number of bank branches).

By the way, both credit cards and payday loans can be used to build credit.

In any case, when applying for a personal loan, a credit card or a payday loan, assess your capabilities in advance and plan to repay the debt. When used correctly, each of these tools will be a convenient solution in the right situation and will not bring any problems. You can find the right loan in Michigan and other states for your purpose through our online lender matching platform.

Alternatives to Credit Cards and Payday Loans

  • Ask for employer assistance. Although it might not be easy, you could ask your employer for a cash advance on an upcoming check.
  • Build a banking relationship. A local bank or credit union might have loans available as long as you have good credit and a permanent income. Check your credit and show that you’re a reliable borrower. Credit union loans come with lower interest rates than cash advance and payday loans.
  • Working with creditors. You creditor may be able to offer you relief options, such as temporary payment reduction, stopping payments for several months or delaying payments for a few months.
  • Get help from friends or family. If you need cash instantly and can rely on a friend or relative, that might be a better alternative to a credit card cash advance or payday loan. Make sure you will be able to pay off the debt on time, otherwise, you risk damaging the relationship.
  • Apply for a peer-to-peer loan. These loans involve no paperwork, but they still require you to have a credit score of at least 600 and a stable source of income. But interest rates can be high when compared with credit cards.
  • Using home equity. Although getting a home equity loan isn’t a quick solution, you could consider it if you have plenty of equity in your home. If you can’t pay it back, though, you may lose your home.
  • Retirement account withdrawals. A retirement account withdrawal won’t hurt your credit score and could help you avoid more debt.

If you’re not in dire financial straits currently, learn how to build an emergency fund to reduce your stress.