If you need money fast, to pay bills or for an emergency, there are several options available to you. But today we’ll look at the differences between a credit card cash advance and a micro loan. Credit card cash advances and micro-loans have at least one thing in common: they are ways to get money quickly. But before you decide on either option, it’s helpful to understand the key differences between the two.
First of all, a quick description:
A cash advance is a short-term loan that you take out with your credit card.
-A micro loan is a flexible term loan that usually requires only a few application procedures and has a quick turnaround time. Lenders are often easily accessible online.
We will briefly compare the differences between several aspects of these types of transactions. These include the amount that can be borrowed, repayment terms, fees and interest, and qualifications for approval.
Borrowable amount
Microloans can vary widely, but are generally between $100 and $5000. This depends mostly on the checks the lender performs; those that rely on your credit score will generally be inclined to lend larger sums, while no-inquiry loans have smaller amounts. Non-investigative loans often rely on simple bank checks that make the process much faster and easier to access.
The amount you can borrow with a cash advance is usually limited to a percentage of your credit card limit. In most cases, this is a few hundred dollars. Don’t be surprised if your credit card has daily, weekly and monthly limits for cash advances. It is very common to see a daily cash advance limit of less than $500.
Terms of repayment
Unlike regular purchases with your credit card, a cash advance generally starts earning interest immediately. In other words, there is no time limit for interest to accrue as there is with normal purchases.
A micro loan also earns interest, of course. The main difference is the repayment period. Microloans are fairly flexible in terms of repayment dates, but you must make regular payments, every week or two.
With a cash advance, you can have a long-term debt, if you wish. Beware, however, that the interest rates are very prohibitive as we will see.
Fees and interest
For a cash advance, you pay an initial fee – this varies depending on your credit card, often $10 or 5% of the amount you withdraw. Then you pay interest on your cash advance, an annual rate usually around 24%, but often higher. The only fees associated with this are the initial fees.
Keep in mind, however, that cash advances linked to a credit card could affect your credit rating. If you have trouble repaying the advance, this information will be reported to the credit bureaus and could affect your credit rating.
With a micro loan, you have no upfront costs. Your interest is spread out according to the payment frequency established in your contract. Interest can sometimes be high, but many lenders have annual rates around 20%. There may be other fees depending on the lender, but these are associated with defaults, insufficient funds or changes to your file.
Micro-lenders rarely contact the credit bureaus, so if your repayment becomes difficult, at least your credit won’t suffer immediately. Of course, if your repayment becomes problematic enough to be sent to a collection agency, they will probably contact the credit bureaus.
In summary: You pay a fixed amount of interest for a payday loan. For a cash advance, the interest you pay depends on the length of your debt. In terms of the impact on your credit report, the cash advance is more likely to be damaging.
Approval criteria
To qualify for a cash advance, you must have a credit card that authorizes it.
For a micro loan, there can be vast differences in approval criteria depending on the lender. In Quebec, they are often based on 2 main aspects: your income and your debt ratio. As long as you have a stable job and no irregularities in your banking history, it is usually very easy to get a loan quickly. Of course, you must still be of legal age and a Canadian citizen, at least.
Precautions
Now that you understand the differences between cash advances and microloans, it is important to consider the disadvantages of both. One of these disadvantages is that they are very expensive. Personal loans are notorious for dragging unwary borrowers into a longer than expected repayment. But if you are careful and make your repayments on time; this can be very affordable.
Cash advances can also be very expensive. Not only do you have to pay an upfront fee to get one, but you immediately start accruing interest on the amount advanced. What’s worse, the annual interest rate will likely be much higher than the interest rate on your credit card purchases.
