Money 101: What is a cash advance

Equipping kids with financial knowledge is pivotal for cultivating a future of prudent financial decision-making. This updated guide takes a closer look at cash advances and their pros and cons, with insights from governmental and educational sources to offer a more comprehensive understanding and teaching approach.

Understanding cash advances

Cash advances are short-term loans that can be obtained through credit cards, payday loans, or other forms of lending. They are known for their immediate availability but come with high costs due to fees and interest rates that accrue right away. Unlike regular credit card transactions that might have a grace period for interest accrual, most cash advances start accumulating interest the moment the cash is withdrawn​.

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Educational points on cash advances

1. High costs and APRs: Cash advances and payday loans are notorious for their outrageously high fees and interest rates. For instance, a typical payday loan might involve borrowing $500 with a $75 fee. On top of that, it might also come with a substantial annual percentage rate (APR) far exceeding standard loan or credit card APRs​​. So if you need to roll over or renew – take longer to pay off the initial loan – you’ll owe that APR on top of the principal, plus any additional renewal fees. Pretty soon you could be paying far more than you originally borrowed.  

2. Military protections: For families in the military, it's noteworthy that there are specific protections in place under the Military Lending Act. The APR for payday loans to military personnel is capped, highlighting the need for regulations that prevent financial exploitation​​.

3. Alternatives to borrowing: Before resorting to cash advances, payday loans, or other types of financing, consider alternatives. Options might include borrowing from family or friends, seeking extensions on bills, negotiating interest rates and fees, or consulting with a credit counselor for financial advice​​.

Practical tips for teaching kids about financial responsibility

• Discuss alternatives: Cash advances and other types of financing should only be used as a last resort. Use the high costs associated with cash advances as a lesson to discuss the importance of exploring all financial options before deciding to borrow, especially under terms that are not favorable.

• Emphasize planning and saving: Highlight the value of saving and planning for financial needs ahead of time to avoid the need for high-cost borrowing options.

• Military financial resources: For military families, point out available resources and aids that offer financial help and advice, emphasizing the importance of utilizing these supports when needed​​.

Cash advance FAQs

Q: Are military personnel protected against the costs of cash advances?

A: Laws cap the interest rates on cash advances for military members to protect them from high-cost borrowing options​​. However, it’s important to note that even those capped APRs can be significantly higher than credit cards and other interest rates. 

Q: What are some alternatives to cash advances and payday loans?

A: Alternatives include negotiating fees and rates, refinancing or consolidating, borrowing from friends or family, seeking bill extensions, or consulting with a credit counselor.

Q: Can cash advances affect your credit score?

A: Yes, they can indirectly impact your credit score by increasing your credit utilization ratio, especially if the borrowed amount is not repaid promptly​​.

Q: How can I responsibly manage a cash advance to avoid negatively impacting my credit score?

A: Cash advances and other financing should always be a last resort to savings and other methods. To manage a cash advance responsibly, only borrow what you can afford to repay quickly, keep an eye on your credit utilization, and explore lower-interest options to avoid accruing high interest​​.

By integrating lessons on the high costs and potential pitfalls of cash advances, alongside exploring safer financial practices and alternatives, parents can provide their kids with a solid foundation in financial literacy. This education is essential for fostering a future where financial decisions are made wisely and with a thorough understanding of potential consequences.

For more detailed information, you can refer to the Consumer Financial Protection Bureau and the International Trade Administration​ for guidance on cash advances and financial transactions in international trade, respectively.

This blog post is provided "as is" and should not be relied upon as a substitute for professional advice. Some content in this post may have been created using artificial intelligence; however, every blog post is reviewed by at least two human editors.