How do Cash Advances Work?
How do cash advances work? (These products are also known as payday cash advance, instant cash advance, and cash advance loans)?
Instant cash advance, payday cash advance or cash advance loans, are three of the most lucrative types of loans that financial institutions can make. The reason for this is that often people are desperate for the cash. They need it to pay for food and other day-to-day expenses that simply cannot wait until the next payday. The people who opt for these loans are often of lower income and those who do not have many alternatives for accessing quick cash, so they will gladly pay whatever interest rates these lenders are asking.
The way these payday cash advances or instant cash advances work, is that you show the lender proof that you have a bank account into which your pay cheque is automatically deposited each week. You also present proof that you are gainfully employed, so that the lender knows you are good for the repayment amount of the loan. Finally, you present proof of the amount of your take-home pay cheque, after all taxes and other charges. This proof can be in the form of bank statements showing the amounts deposited by your employer each week. You then sign the appropriate paperwork giving the lender your permission to withdraw monies from your checking account. They will need this permission in order to collect the balance, plus interest, on the loan.
The lender then makes you a loan, equal to the amount of your next pay cheque, less the interest to be charged. The interest rate can be very high, sometimes running upwards of 50%, or even more, but the loans are normally for a very short time period, generally no more than two weeks. When the borrower receives his next regularly scheduled pay cheque, the lender puts through a request to the borrower’s bank to be paid the balance due on the loan.
In summary, payday cash advances are also called instant cash advances, fast cash advances or cash advance loans. Some enterprising lenders take the whole process online and call them “online cash advances,” where the amount of the cash advance loan is deposited directly into your bank account. Regardless of what they are called, these payday advances are generally a very poor deal from the buyer’s standpoint and should be avoided if at all possible.
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October 22nd, 2008 at 12:14 pm
Really good summary Jimmy, and I agree that payday loans should be avoided (just like all borrowing) if it’s at all possible. While not many people who would normally need a cash advance loan have other sources of emergency funding, any alternative is probably better than a ridiculously high interest rate. Taking a short-term high interest loan once isn’t so bad, but getting in the habit of using payday lenders is like committing financial suicide by interest.