Cash Advance Industry
The cash advance industry has grown very quickly in recent years to
meet the demands of a population that is finding it more and more difficult
to live from paycheck to paycheck. This article explores some of the
myths surrounding the cash advance industry as well as situations where
it would and would not be appropriate to use any sort of cash
Why Cash Advances Exist
Many Americans live from paycheck to paycheck. When emergencies or
unexpected financial demands present themselves, the fact is most people
are unable to handle them. The consequences of spending more money than
you have are drilled into most consumers from the very day they get
their first bill - pay up or we'll make you sorry.
How do creditors do this? There are a variety of ways, all of them
tied to the various credit bureaus that are established across the country.
If you miss a payment on a credit card, bounce a check, or breach a
financial understanding with a lender, the easiest way for them to compell
you to pay your bills is the threat of destroying your credit score.
This score is what future lenders, landlords, and other sources of credit
will use to determine what credit - if any - you are eligible for.
Let's say you've just gotten your paycheck, you've paid all of your
bills for the month on time, and it seems as though you're set until
the next pay period arrives. Then, without warning, disaster strikes
- let's say your car breaks down which means you can't get to work.
If you can't work, you won't get paid; if you don't get paid, you can't
pay rent, which is conveniently due sooner than your next paycheck.
Suddenly you're faced with a choice: fix your car, or pay your rent.
You could do both if only one or the other would accept payment after
your next check arrives, but unfortunately most creditors won't take
that chance. It is because of situations like these that a need for
a short-term loan is born, and that loan is called a cash
How A Cash Advance Works
Cash advances are short term loans that are issued to cover an immediate
financial need. Situations where such a short
term cash advance would be appropriate would be auto repairs, rent
or lease payments, or any other situation where your budget doesn't
allow you to pay for a bill or charge that needs payment immediately,
but you would be able to when your next paycheck is issued. The biggest
mistake that consumers make when applying for a cash advance occurs
within the repayment terms; that is to say the lack of understanding
that the cash advance must be rapayed when the customer's next paycheck
is received in order to avoid costly rollover fees.
Remember the previous example of car repairs and rent being due at
the same time. Both bills could get paid if an extension was allowed,
but that kind of luck happens rarely. Instead, if you took out a quick
cash advance, you would be able to cover both and do so by paying
a nominal fee for the convenience of the loan.
Taking out an instant cash advance
isn't without its own set of consequences. The most widely advertised
component of cash advance use is the high APR (annual percentage rate)
associated with many cash advance products. This APR can usually be
in the 400% range depending on the size of the loan, which is in sharp
comparison to many credit cards that charge anywhere from 14% to 28%
APR in interest. Most cash advance companies charge anywhere from $15
to $30 dollars per hundred borrowed.
It's important to consider the purpose of a cash advance in order to
understand the figures that surround it. Cash advances are not intended
for long-term use by any means, so the use of an annual percentage
rate to size-up the product is inappropriate. Since the terms of most
cash advance deals extend about one to two weeks (depending on the issue
date of your next paycheck) the total time the funds are borrowed can
be anywhere from 7 to 14 days - a far cry from the 365 needed to calculate
an annual based rate of interest. The end result of a loan for this
period is a much easier to swallow figure of roughly 30%, again depending
on the current financial climate and the policy of the borrower you
Still, that 30% can seem awful high... why is this the case? The answer
is quite simple: think of the clients that apply for these loans. Though
many of them will pay back the loan on time, there are some (roughly
20% by most industry standards) that will default on the loan and never
pay back the funds borrowed. In order to offset this risky series of
loans, lenders must charge higher interest rates in order to stay in