If you need cash for an emergency, two options might immediately spring to mind: taking out a payday loan, or using a credit card cash advance. But whilst both options are increasingly popular across Canada, they’re not exactly the same. So which is better?
What Is a Credit Card Cash Advance?
A credit card cash advance is when a credit card is used to withdraw cash. It’s important to understand how this is different from using a credit card to pay for items directly (e.g. at a grocery store or gas station): cash withdrawn from a credit card is charged a higher interest rate than direct purchases, and it can have other fees attached. In addition, many companies waive credit card benefits for cash advances. All of this means that cash advances need to be treated as a separate form of borrowing from regular credit card use.
Most credit card companies have a limit on how much can be withdrawn as a cash advance, calculated as a percentage of the card’s credit limit. And repayment depends on the card’s terms and conditions; most require borrowers to make a minimum monthly payment to cover their credit card balance, depending on the amount outstanding. Paying off the cash advance in full is also an option, at any time.
What Is a Payday Loan?
A payday loan is a totally different type of borrowing, available from specialized lenders on a very quick turnaround. Small loans of up to $1,500 are available, usually on the agreement that the borrower will entirely repay the funds using their next paycheque. For simplicity, lenders state the cost of a payday loan as a single repayment amount, rather than as an interest rate plus fees, and only if repayment is not made on time will the amount change. These small loans are easy to get and have minimal requirements, and they too can be repaid in full at any time.
The Similarities Between Credit Card Cash Advances and Payday Loans
So both credit card cash advances and payday loans provide an easy avenue to quick cash. There are other similarities between them; they are both:
- Unsecured forms of borrowing
- Not dependent on a credit check
- Small in size (compared to other types of personal loan)
- Short-term in nature
- Reflected as a form of debt in your credit report
The Differences: Credit Card Cash Advances vs. Payday Loans
But while these forms of borrowing broadly have much in common, the details of how they differ is what makes the real difference to everyday consumers. Let’s see how these differences stack up:
Cost
If we look simply at APRs (an annualized way to compare loan costs), then payday loans can be said to generally cost more than cash advances. But this is slightly misleading, as no payday loan is ever going to be held for a year; the average loan is held for two weeks. So for the period of time funds are actually being borrowed for, the relative costs are similar.
However, payday loans charge a flat fee; what you agree to when taking out the loan is what you pay. The simplicity of this means it is easy to understand exactly how much a payday loan is going to cost. And whilst different lenders may charge different amounts for their services, the maximum amount that any licensed payday lender can charge is set by the government.
Credit card cash advances, on the other hand, have a variety of costs, including fees and interest that compounds the longer it takes to repay the funds. And every lender charges different interest. This means that it is not clear how much a credit card cash advance will cost when you take it out, and research shows that most consumers simply do not know how much they’re paying to borrow money in this way.
Result of Cost Comparison:
| Pro | Con | |
| Payday loan | Easy-to-understand cost | Higher APR |
| Cash advance | Lower APR | Complicated cost structure |
Speed
Payday loans are usually available same-day or next-day, and credit card cash advances are available as soon as you can get to an ATM. So both are almost immediate solutions, with one important caveat: you need to already have the credit card. If you don’t, then you need to apply for one and wait the several weeks it takes to be approved and receive the card, before you can borrow from it.
Result of Speed Comparison:
| Pro | Con | |
| Payday loan | Speed not dependent on other factors | May take up to a day to access |
| Cash advance | Immediate access possible | Speed dependent on already having credit card |
Accessibility
Payday loans do not rely on a credit check; all that’s needed to get a payday loan is ID, an active bank account, and an eligible form of income. And while taking out a cash advance on a credit card does not have any requirements, getting the card in the first place does. Most credit cards rely on a credit check, and many have income requirements and annual fees too.
Result of Accessibility Comparison:
| Pro | Con | |
| Payday loan | Minimal eligibility requirements | Requires borrower to apply |
| Cash advance | No application needed if credit card already held | Borrower must have applied/qualified for credit card already |
Conclusion
Which route to borrowing you choose will depend on your priorities and situation, but unless you already hold a credit card with borrowing room on it, a payday loan is the clear winner for fast cash. You can find out more about how payday loans work or apply for one now with Magical Cash, a trusted lender with a history of satisfied customers.
