Why It Is Not Advisable To Get A Cash Advance + Alternatives To A Cash Advance

Written by Shannon Wong on May 2, 2024

Key Takeaways

Cash advances are costly due to high fees and interest rates, lack a grace period, and can negatively impact your credit score. They also offer no rewards and can lead to a debt cycle. Safer alternatives include personal loans from licensed moneylenders, borrowing from family or friends, or using lower-interest credit options. Planning and creating an emergency fund are crucial to avoid the need for cash advances.

Cash advances might seem like a quick fix for your immediate financial needs, but they often come with hefty drawbacks that can significantly strain your finances in the long run. This article will explore why opting for a cash advance from your credit card or other sources is not advisable.

We will also provide practical and safer alternatives to cash advances, ensuring you are well-equipped to handle your financial needs without falling into a debt trap. By understanding these risks and the available options, you can make informed decisions that protect your financial health.

Why It Is Not Advisable To Get A Cash Advance

High Fees and Interest Rates

Cash advances have high-interest rates and fees associated with them. Unlike regular credit card purchases, cash advances begin accruing interest from the moment the money is withdrawn. This interest is often much higher than the rates applied to standard purchases—sometimes up to 27% per annum, significantly increasing the total amount you owe.

Additionally, cash advance transactions are typically subject to a fee, which can be a fixed amount or a percentage of the advanced sum, whichever is higher. For example, withdrawing $1,000 could instantly incur a fee of $60 or more, adding to the financial burden.

No Grace Period

Unlike purchases made with credit cards, which might have a grace period during which no interest is charged if the balance is paid in full, cash advances have no such benefit.

From the day the cash is withdrawn, interest starts accumulating immediately, making them an expensive option for obtaining quick cash. This immediate calculation of interest increases the overall debt, making it harder to repay quickly.

Impact on Credit Score

Opting for a cash advance can also negatively impact your credit score. Cash advances add to your credit card balance, increasing your credit utilisation ratio—the ratio of your credit card balance to your credit limit.

A high utilisation ratio can signal to creditors that you’re over-reliant on credit, potentially lowering your credit score. This decrease in credit score can affect your ability to secure loans in the future or result in higher interest rates on new credit.

Lack of Rewards

Cash advances do not earn rewards or cashback—benefits often associated with regular credit card usage. Using your credit card for purchases may accumulate points, miles, or cash back, translating into significant savings over time. However, these perks do not apply to cash advances, meaning you miss out on potential rewards.

Potential for Debt Cycle

Finally, the ease of obtaining cash through advances can lead to a debt cycle. Because they are so readily accessible, there’s a risk of dependency on cash advances for regular expenses, leading to an unsustainable financial situation. Each cash advance increases the debt you carry, which can quickly become difficult to manage, especially with the compounded fees and interest.

Understanding these risks associated with cash advances is crucial. Instead of relying on this costly method, exploring alternatives to cash advances is advisable, which will be discussed in the following section of this article.

Looking for a safer, more reliable way to manage your finances? At 1AP Capital, we specialise in providing comprehensive loan solutions tailored to individual needs without the high costs of cash advances. Discover how our flexible and transparent lending options can help you today. Apply for a personal loan with us and take the first step towards financial stability.

Alternatives To Cash Advances

When facing a financial emergency or shortage, it’s important to consider less costly and more sustainable alternatives than cash advances. Here are several options that can serve as better financial solutions:

Personal Loans from Licensed Moneylenders

Opting for a personal loan from a licensed moneylender can be a viable alternative. These loans usually offer lower interest rates than cash advances and provide a structured repayment plan.

This helps in managing your debt more efficiently without the burden of excessive fees. Moreover, licensed moneylenders in Singapore are regulated, ensuring you are not exposed to unethical lending practices.

Borrowing from Family or Friends

Another alternative is to borrow money from family or friends. This method can be advantageous as it typically involves little to no interest.

It also offers flexible repayment terms, which can be adjusted based on your financial situation. However, it’s crucial to approach this option with a formal agreement to avoid any misunderstandings that could strain your relationships.

Credit Options with Lower Interest Rates

Exploring other credit options, such as credit lines or overdrafts, might also be beneficial. These options often come with significantly lower interest rates than cash advances and provide a revolving credit facility, which means you can use the credit up to a specific limit and replenish it as you repay. This flexibility makes it easier to manage cash flow without incurring high costs.

Financial Planning and Emergency Funds

Establishing an emergency fund is the most effective way to avoid the need for cash advances. By setting aside a small amount of money regularly, you can build a financial buffer for emergencies. Engaging in sound financial planning to manage expenses and save regularly can also reduce the likelihood of needing immediate cash in tough times.

Utilising Community Resources or Financial Assistance

For those in significant financial distress, seeking out community resources or financial assistance programs in Singapore can provide relief.

These programs are designed to help individuals manage their finances through counselling, financial aid, and support services, potentially preventing the need for high-cost borrowing options.

FAQs on Cash Advances and Their Alternatives

What Is a Cash Advance?

A cash advance is a service provided by most credit card and charge card issuers that allows cardholders to withdraw cash, either through an ATM or over the counter at a bank or other financial agency, up to a certain limit.

Why Should I Avoid Taking a Cash Advance?

Cash advances come with high fees and interest rates, do not have a grace period for interest charges, and can negatively impact your credit score. They also do not earn rewards like other credit card transactions and can lead to a debt cycle if not managed carefully.

What Are the Typical Fees Associated With a Cash Advance?

The fees for a cash advance can vary but typically include a higher interest rate than regular purchases and a transaction fee, which is either a flat rate or a percentage of the amount withdrawn.

How Do Cash Advances Affect My Credit Score?

Taking out cash advances increases your credit utilisation ratio, which is a key factor in calculating your credit score. High utilisation can signal to lenders that you are over-reliant on credit, potentially lowering your credit score.

What Are Some Alternatives to Taking a Cash Advance?

Alternatives to cash advances include personal loans from licensed moneylenders, borrowing from family or friends, using credit lines with lower interest rates, and establishing an emergency fund to cover unexpected expenses.

How Can a Personal Loan Be a Better Option Than a Cash Advance?

Personal loans usually offer lower interest rates than cash advances and provide a structured repayment schedule, which can make budgeting easier and help avoid the high costs associated with cash advance fees and penalties.

What Steps Can I Take to Avoid Needing a Cash Advance in the Future?

Building an emergency fund, managing your budget carefully, and using credit responsibly can help you avoid the need for cash advances. Additionally, exploring other credit facilities with lower interest rates and more favorable terms can be beneficial.

Smarter Choices Over Cash Advances

While cash advances are a quick solution for immediate financial needs, they come with significant drawbacks, such as high fees, high-interest rates, negative impacts on credit scores, and the potential to lead to a debt cycle.

Instead, exploring alternatives like personal loans from licensed moneylenders, borrowing from acquaintances, utilising lower-interest credit options, or building an emergency fund are far more sustainable and cost-effective methods to manage financial emergencies.

If you need financial assistance, choosing a solution that aligns with your financial health and future goals is crucial. At 1AP Capital, we understand the importance of responsible lending and offer various loan products to meet individual needs. We’re committed to providing transparent and manageable loan options that help your financial situation.

Feel free to apply for a loan with us today and explore how our personalised loan solutions can support you without the hefty costs of cash advances.

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