Cash Advances vs. Personal Loans: Which is Better?

There are no shortage of options when it comes to helping finance both expected and unexpected expenses either for yourself or for your business. Personal loans, for example, rank among the most popular – and most stable. According to data from Transunion, 22.7 million consumers used personal loans in 2023. 

But when you’re low on cash, or have a financial emergency, a cash advance might feel like a more straight-forward way to get some money in your pocket, fast. And it’s true, it is. Cash advances are quick. So, if you’re in a real bind, they might be worth exploring. However, as with anything that sounds potentially too good to be true, there are quite a few things to keep in mind when it comes to cash advances. 

Let’s break down the differences between personal loans and cash advances to help you find out which one is right for you, shall we?

What exactly is a cash advance?

A cash advance is a loan that you can take out from the bank against your credit card limit. But while the borrowed money technically comes from your credit card, the associated interest rates are significantly higher than the revolving credit used to make purchases using the card itself – up to 30% in some cases. There are also fees associated with taking out a cash advance, as high as 5%. 

Which one is right for me?

There are a few ways to use a cash advance. First, if you have an ATM pin number, you can withdraw money from an ATM at the bank. You can also request a pin number at the bank, or get what’s called a convenience check, which you can cash for cash advance loans. 

Payday loans, which can be obtained through loan agencies and, in more recent years, through apps and websites, are short-term loans with high interest rates that are meant to tide you over until your next paycheck. 

For business owners looking for a quick flush of cash, there is also something called a Merchant Cash Advance for businesses, which is repaid through future credit card sales.

Regardless of your credit limit, the amount of money you have access to for a cash advance will not necessarily match the amount of cash you’re permitted to take out. 

What are some pros and cons of using a cash advance?

Pros

• Speed: when you are in a crunch and need to get your hands on cash fast, taking out a cash advance is arguably one of the quickest ways to go about doing so.

• Ease: As long as you have not maxed out your credit card, you will be able to take out money against your limit simply by going to an ATM or bank branch.

Cons 

• High interest and fees: the fees and interest associated with taking a cash advance are even higher than the already skyrocketing interest rates associated with credit cards. 

• No grace period: when you make a purchase on a credit card, you are typically given a one month grace period before interest accrues. That is not the case for cash advances. You start accruing interest from the moment you take out the cash advance, making the likelihood of accumulating debt from a cash advance high. 

When would I use one? 

The main impetus to opt for a cash advance is an emergency – when you need some cash to front expenses that you have ahead of your next payday or the next time your cash flow comes in. 

Ideally, you would take one out only when you know you’re going to be able to pay it back right away, as the high interest rates start compounding – quick. 

OK, so what is a personal loan? 

A personal loan is a sum of money borrowed from your bank or financial institution that you pay back in fixed installments. This loan accrues a set amount of interest, and can be obtained for both personal and professional purposes. Think: home renovation, covering expenses while starting a small business, or, as is becoming more and more common practice, consolidating debt. 

Like a credit card, a personal loan is an unsecured loan, meaning it is a loan that is not issued based on collateral. Whereas secured loans, like mortgages and car loans, are based on collateral, like your home and car respectively, unsecured loans are not. As a result, they are often issued based on factors like credit score and income. The approved amount of your loan can vary depending on those same factors.

They are also more flexible in their repayment terms than some other types of loans. Like a mortgage, when you take out a personal loan, you have some choices when it comes to the amount of time you’ll take to repay the amount. You may choose an option that will take longer to pay off but offers a higher interest rate, or a shorter-term agreement with a lower interest rate.  to take longer to pay it off with a lower interest rate, depending on your current financial situation. 

What are the different types of loans I can take out? 

• Fixed-Rate Loans

A fixed-rate personal loan is one where the interest rate is determined at the beginning of the loan’s life and does not change over the course of the contract. This would be a good choice for someone who values more certainty or is less risk-averse, or during a stable time for the market. 

• Variable-Rate Loans 

A variable-rate personal loan is one where the interest rate is at liberty to fluctuate over time depending on the market. If the market falls, there is a chance that your payments or rates would go down, however, there is a risk that you end up paying more money in the long term if the market goes up. 

• Debt Consolidation Loans

Debt consolidation loans can help with tackling mounting debt at a potentially better rate than the skyrocketing APR% typically associated with credit cards. The amount of savings depends on how much lower the rate you get approved for can be, but many institutions promise rates starting as low as 7%. it’s an appealing option, especially when current credit card interest rates average about a whopping 25%. 

What are some pros and cons of taking out a personal loan?

• Pros

  • Fixed interest rates: many personal loans offer fixed interest rates, which means they cannot go up over time. This offers more stability and knowledge of what the total amount you’re going to owe over the life of the loan will be, so you’re not surprised by a new number month to month.

  • Predictable repayment schedules: no matter what you plan to use a personal loan for, the payment will be due at the same time each month, making it easier for you to plan around and budget accordingly while you pay the loan back.

  • No collateral required: personal loans are ideal for people who do not yet own a home or a car, or do not want to put their assets at risk for a loan. Since collateral is not required, your assets cannot be seized under the terms of your loan, though there are other risks, like a drastically decreased credit score and having your loan sent to collections. 

• Cons

  • Higher interest rates than secured loans: while not always necessarily the case, unsecured loans can have higher interest rates than those offered through mortgages or other secured loans. That’s because the bank is taking a larger risk by offering a loan to someone without the promise of collateral.

  • Fees: fees for personal loans are comparable to any other fees you might take on when applying for other types of loans: there is the interest, of course, but also origination fees when you first open the loan, the potential for late fees, and another, more surprising fee – an early payoff penalty. In some cases, you could be charged for paying your loan off faster than expected. That’s why it makes more sense to continue paying the terms of the loan, even if you end up coming into a windfall at some point during its contract.

  • Potential for debt accumulation: as with any loans, secured or unsecured, taking out a personal loan can make you vulnerable to getting into debt. Depending on your ability to pay it off and how much you are able to pay down over time, taking out a personal loan can be a slippery slope if you do not have a plan in place to pay it back in a timely fashion. 

When would I use one?

There are many different scenarios in which a personal loan might be the right option for you. They depend on your financial situation, and what you’re hoping to achieve with the loan. Since personal loan interest rates can, in many cases, be more reasonable than credit card interest rates, they may be ideal for things like taking on a home renovation project, starting a business, or consolidating debt. 

Let’s compare the two.

If you’re still not sure which one of these options are right for you, let’s consider a few key details of each to make a more informed decision. 

Interest Rates, Fees, and Repayment Terms

As mentioned, interest rates on cash advances are typically much higher than rates on personal loans, upwards of 30%. Personal loans on the other hand can range in rate, starting as low as 8%. Cash advances can also some with additional fees and shorter repayment terms, increasing the risk of taking on more debt by using one. Personal loans, on the other hand, typically work on a fixed rate and offer an easy-to-follow repayment schedule that can be set over the course of a few years. 

Approval Process and Funding Time

While online applications for personal loans have sped up the application process, cash advances are always the speedier option since they can be accessed almost instantly, if using a credit card or at an ARM. Personal loans, in contrast, could take several days to fund. 

Impact on Credit Scores

While using a cash advance does not impact your credit score directly, it can increase your credit utilization ratio, aka the amount of credit you're using versus the total credit you have access to, and that can have a potential impact on your score.

Personal loans are less likely to negatively impact your credit score, and in fact can improve your credit profile by adding diversity to your credit mix – as long as you maintain a timely payment schedule. 

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