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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 advance.

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 advance.

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.

Consequences

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 choose.

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 business.

So if I don't get a cash advance, what happens?

On the other hand you might want to consider not taking out a cash advance, but before you do make sure you understand what might happen:

If you bounce checks from your bank account, the bank may choose to terminate service or charge NSF feed (non-sufficient fund fees) of up to $40. Not only will your bank charge you for the bounced check, but it's likely the person or company that you wrote the check to will also charge you a bounced check fee, not to mention a late fee on top of that.
Bouncing checks is also a federal crime, and could result in punative damages and jail time in some states.
Credit card companies are notorious for charging late fees that often exceed the payment amount missed. This amount can also be added to your total amount due and it is likely that they will charge interest on top of this late fee.
Apartment complexes and landlords generally have a provision in the lease agreement that states that if rent is not paid on or before the due date, the person(s) on the lease have to pay market rent for the unit that they occupy. This means any discounts that you received when you signed the lease no longer apply, which will no doubt make rent much more expensive for that month.
It's also not uncommon for landlords to charge upwards of $10 per day that the rent is late.

All of these situations describe short-term penalties, but it's also important to consider the most devastating (and long-term) consequence of not paying your bills on time:

Each creditor has the right to report your non-payment to any/all of the credit bureaus that track your ability to pay your bills on time. A negative comment on this report will cause your interest rates to rise and will prevent you from opening new accounts or expanding your credit line in the future.

Because of the long term reprocussions of missing just one bill payment, most consumers choose to use cash advance products to supplement their income during times of financial need. The short-term cost of $15 to $30 per hundred pales in comparison to the devastating long-term costs of missing even one payment, which is why so many people choose to use cash advances when they find themselves in a financial bind.