The difference between a pay day loan and a cash advance

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When you are in urgent need of a short term loan it is difficult to assess the options and work out which might be the most suited to you.     The terminology can be confusing – especially when similar terms can be used to mean different things.   Here we look at the difference between a pay day loan and a cash advance.

Payday loans are loans which are generally used to see you through to your next pay day.   They are unsecured loans.  They are quick to apply for and many lenders do not lend based on your credit score but will lend based upon your income.  A lender like www.wonga.co.za deals with pay day loans and guides you through the process with relative ease with their online application process.    Pay day loans can be taken out for just a few days.  The maximum life of a pay day loan is usually around 30 days.  The loan is supposed to be paid off in one instalment on the due date with any interest and charges due.   On the due date the lender generally will automatically collect the amount due from your bank account.

The maximum payday loan you can obtain generally depends on your income.  Some sites like the aforementioned wonga.co.za will limit the amount you can borrow the first time they lend to you. If all goes well with the first loan and you borrow money from them again they will increase the amount you can borrow.  This builds up a relationship with you.

Confusingly a type of pay day loan is sometimes called a “cash advance”.    A true cash advance however comes from credit you already have available to you.   It is provided via your credit card – Cash is withdrawn using your credit card (for instance from an ATM).  Your limit will be set by the credit limit on the card or another lower limit set by the card issuer.    A cash advance obtained in this way can be an easy way to get cash in an emergency situation or where a credit card payment is not accepted.    The terms of the “loan” will be as set out in your agreement with the credit card provider.  These will not always be clear.

There are usually fees charged by a card issuer when a cash advance is taken out.   These are usually calculated as a percentage of the amount loaned.  Interest rates charged on cash advances are also usually higher than interest rates charged by the card issuer on cash purchases.   If you have a credit card on an interest free period these terms are unlikely to apply to cash advances.   You will be sent a bill for the cash advance on your usual credit card statement.  At the very least, minimum repayments will need to be made.  Note that in many cases if the full balance is not paid off in full by the due date and you have also made purchases with your credit card the sums you pay to credit your balance will be applied to credit borrowed for your purchases before they are applied to any cash advances.   This can mean you are stuck with paying the higher rate of interest for the cash advance for some time.  You should check the terms provided by your credit card issuer.

When taking out either a pay day loan or a cash advance make sure you know exactly what it is you will be borrowing in total and what the repayment terms are.

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