When it comes to borrowing, two options stand out prominently: cash advances and traditional personal loans. Each serves different purposes and comes with its own advantages and drawbacks. Understanding the nuances between them is the key for making well-informed financial decisions. In this comprehensive guide, we’ll explore the pros and cons of both of them, offering a fresh perspective to empower your financial choices.
Cash Advances: The Quick Cash Solution
Cash advances, often known as payday loans, provide short-term access to funds. They cater to individuals facing unexpected financial needs or emergencies. They typically offer funding between $500 to $1,000, but their APR is very high, it is about 400%. That is why we don’t recommend them.
Now, let’s delve into the unique characteristics of cash advances:
Pros of Cash Advances:
- Easy Access to Funds: Cash advances are well-known for their fast approval and disbursement. When the time is important, they offer a lifeline. An hour and you can be approved, that is the fact!
- Minimal Documentation Required: The application process for cash advances is streamlined, involving less documentation requirements compared to traditional loans. In most of cases, no documents will be required.
- No Credit Check: Many cash advance lenders do not perform a hard credit check, making them accessible to borrowers with varying credit profiles. In fact, most lenders don’t check your credit report at all.
- Accessibility for the Unbanked: Cash advances also cater to individuals without traditional bank accounts, often providing funds in cash, ensuring widespread accessibility.
Cons of Cash Advances:
- High Interest Rates: Cash advances typically come with higher interest rates compared to traditional loans, making them more costly borrowing option. They offer an average of 400% APR, but some will cost you over 1,000%. Be careful with that. There are much cheaper options these days, that won’t access your credit file.
- Short Repayment Period: Borrowers are usually required to repay the full loan amount along with the fees, on their next payday. This short timeframe can pose challenges for some. This period is about one month.
- Risk of Debt Cycle: The easiness of obtaining cash advances can lead to a cycle of debt if you don’t manage them in the right way, which means – pay them on time. Responsible borrowing and timely repayment are vital to avoid this situation.
If you don’t pay them on time, the lender can add more fees, making your total loan cost very high, and roll it for a month. This means that the next month you should pay to the lender the new price, which will be significantly higher.
- Limited Loan Amount: Cash advances typically offer smaller loan amounts, suitable for immediate expenses but not for significant financial needs.
$50 to $500 is the most typical amount that people borrow. Some payday lenders offer up to $1,000. If you want over $1,000, improve your credit score and better look at personal lenders.
Now, as we’ve examined cash advances, let’s turn our attention to traditional loans, offering a broader perspective on long-term borrowing.
Traditional Loans: A Dive into Long-Term Financing
Traditional personal loans can be a variety of financial products, such as personal loans, mortgages, and auto loans. These loans often offer longer repayment period, of about 1 to 10 years; a higher amount between $1,000 to $100,000; and better interest rates; their APR vary between 5,99% to 35,99%. But they are a subject of thorough credit checks and rigorous underwriting. Approving bad credit borrowers on a personal loan is possible. However, the best rates are offered to those with perfect credit scores.
This Bankrate study shows that people with bad credit, which by this site is 300 to 629, get 28.50% to 32.00% interest rates. People with perfect credit score range, which is between 720 to 850, gets much cheaper deals, of about 10.73% to 12.50%. That is a significant difference.
If you have a loan of $1,000 for 1 year, with perfect credit, you will pay about $100 a month interest. However, with bad credit, you would pay about $300.
“Consumers with good or excellent credit may find average loan interest rates as low as 13.5 percent. … However, some borrowers will get much lower interest rates because these are averages.”
Bankrate also stated.
Now, let’s talk about the pros and cons of personal loans.
Pros of Traditional Loans:
- Lower Interest Rates: Traditional personal loans generally offer lower interest rates than cash advances, ensuring more cost-effective long-term borrowing.
The typical rates vary between 5,99% to 35,99%. They consider mainly your credit score as approval creteria, but not only. These days, many lenders decide to pay attention to other factors like income, income history, education, and many more. Have you recently changed your phone? Surprising, but a fact. Some lenders consider how often you have changed your phone number.
- Extended Repayment Terms: Borrowers benefit from extended repayment periods. This flexibility suits larger financial needs like home purchases or educational expenses.
The period that most lenders offer is between 1 to 10 years. However, more typical is 3 to 5 years. The period also is counted on the amount that you borrow. If you borrow $100,000, the period will be close to 10 years. If you get only 1,000, then no lender will allow you more than 3 years. Only $1,000? Yes, $1,000 is not a lot for personal loans.
- Structured Repayment Plans: Traditional loans often come with structured repayment plans, offering clear payment schedules that help you budgeting and make your proper financial planning.
- Different Loan Options: Personal loans contain a plethora of borrowing solutions, designed to various financial needs. It can be a mortgage, an auto loan, or a personal loan for different purposes.
Most personal loans are unsecured, however in most auto loans, you put your car as a security.
Cons of Traditional Loans:
- Long Approval Process: Traditional loans typically involve more protracted approval process compared to cash advances, which may not be suitable for those in need of immediate funds. Is your credit score high enough? Can your income pay your loan without any problems? Before going to a lender, ask yourself these questions.
- Credit Check Requirement: Many traditional loans performs rigorous credit check as a part of the application process. Some potentially will exclude borrowers with less-than-ideal credit scores. Other finance them, but on a higher rates, that you don’t want.
- Documentation Intensity: Traditional loans often have long documentation process, which can be cumbersome for borrowers who need to provide extensive paperwork.
- Collateral Requirements: Some traditional loans, such as mortgages and auto loans, may require collateral. This means that the borrowers must pledge an asset, like their home or vehicle, as security for the loan. If the loan isn’t repaid, the lender can claim the collateral.
You should know that some traditional personal loans can request approval too. There are pros and cons to providing collateral. If you provide collateral, you should expect a higher chance of approval, a higher amount, lower interest rates. In this article we stated that personal loans are up to $100,000. Ok, but secured loans can be up to $10,000,000.
Not surprisingly, most big legit sites offer personal loans instead of cash advances. You search for “best cash advances,” but you find an article related to personal loans. Why is that? Because personal lenders have all of the pros that payday cash advances have, and none of their cons. So, personal loans can be used instead of cash advances, and you can benefit from their other pros.
Loans of up to $100,000, APR up to 35,99%, bad credit approved, vs. up to $500, and 400% APR. What do you think?
TimesUnion stated: “Traditional payday cash advance loans typically offer up to $500 instant cash for those with bad credit. But they are very expensive, and their APR average is 400%.”
Balancing the Scales: Expert Tips for Informed Borrowing
Now, we’ve discussed the pros and cons of both cash advances and traditional personal loans. It’s essential to know that choosing one over the other, depends on your unique financial situation, needs, and repayment capacity. Here are some expert tips to guide your decision-making process:
1. Assess Your Funds Fast:
- If you need fast access to a small sum of money for an emergency expenses, cash advances provide a practical solution. Ensure you can manage the higher fees responsibly.
- For long-term financial needs like home purchases or business financing, traditional loans offer more suitable option due to their lower interest rates and extended repayment terms.
But. No one said that personal loans approve slowly. In fact, big amount of up to $100,000 can be approved in a day. So, at that point, personal loans beat cash advances.
2. Your Credit Profile:
- A good credit score opens doors to traditional loans with favorable terms and interest rates.
- If your credit history isn’t good, cash advances may be more accessible due to their less stringent credit checks.
Yes, all personal loans are do credit check. So, here we have advantage of cash advances.
3. Consider the Purpose:
- Think about the purpose of your borrowing. For example, things like immediate expenses like medical bills or car repairs, cash advances are better.
- Traditional loans are a better solution for planned, long-term investments like education or home renovation.
4. Repayment Strategy:
- Ensure you have a well-thought-out repayment plan in place before borrowing. This is crucial for both cash advances and traditional loans.
- Budget your finances to accommodate loan repayments comfortably, preventing financial strain.
5. Shop Around:
- Don’t agree on the first offer you receive. Explore various lenders and loan products to find the one that meets your needs.
- Compare interest rates, fees, and repayment terms to make your choice.
- Shopping around is the best way to find the best loans.
In this dynamic world of borrowing, making the right financial decisions requires comprehensive understanding of the options available. Both cash advances and traditional loans have their place in the financial world, each catering to unique needs. It’s crucial to weigh the pros and cons carefully and choose the borrowing option that best aligns with your financial goals and circumstances. Responsible borrowing involves not only securing the funds you need but also ensuring you can comfortably manage the costs and repay the loan as agreed.