Personal Loan vs. Cash Advance

A personal loan is an installment loan that offers borrowers relatively quick access to cash, a lower interest rate than a credit card, and a predictable repayment structure. In contrast, a cash advance provides fast access to cash (sometimes the same day) but comes at a higher cost. 

Borrowers might find themselves weighing these options when facing financial demands that require quick decisions—whether managing an unexpected expense, covering emergency costs, or planning a large purchase. 

Here’s a closer look at how to choose between these two types of funding, considering your financial needs, urgency of funds, and the impact on your credit health.

Personal loan vs. cash advance 

When considering options for quickly accessing funds, two possible choices are personal loans and cash advances. Both financing types offer unique features, catering to differing financial needs and situations. 

• Personal loans: A personal loan is a longer-term financing option provided by banks, credit unions, and online lenders. It offers a lump sum of upfront money and requires regular monthly payments over a fixed term. 
• Cash advance: A cash advance offers immediate access to cash and is a type of short-term financing. Cash advances often come at a higher cost and with less favorable terms than personal loans.

Deciding between a personal loan and a cash advance involves considering factors like the speed of funding, amount needed, cost of borrowing, and potential impact on one’s credit score. 

Below is a comparison, followed by a detailed explanation that includes typical use cases and experiences.

	Personal loan	Cash advance
Where to get	Banks, credit unions, online lenders	Credit card issuers, cash advance apps, payday lenders
Funding speed	1 – 7 days	Instant to 24 hours
Approval requirements	Credit score and history, income, DTI ratio	Often less stringent
Borrowing limit	$500 – $50,000+	Often lower
Interest rates	Lower	Higher
Credit score impact	Hard inquiry	Varies
Fees and penalties	Origination and late fees	Origination and late fees

Personal loan features

Many banks, credit unions, and online lenders provide personal loans. The wide range of loan amounts is suitable for significant expenses or consolidating high-interest debt—approval hinges on your financial health, particularly your credit score and income. 

These loans are versatile, allowing funds to be used for various purposes, from home improvement projects to medical expenses. Borrowers highly value this flexibility.

Though obtaining a personal loan can take several days, the lower interest rates and fixed repayment schedules make it an appealing choice for many. 

• Interest rates: Personal loan interest rates often significantly undercut those of credit cards and other high-interest financial products, making them an economical option for long-term borrowing. 
• Repayment schedule: The fixed repayment schedule offers a clear path to debt freedom, with consistent monthly payments that simplify budgeting and financial planning.

However, applying for a personal loan can reduce your credit score temporarily due to the hard credit inquiry required. This effect is typically short-lived, and the potential benefits of receiving a lower interest rate than some other financing options often outweigh the temporary dip in credit score. 

As borrowers make consistent payments, their credit scores can improve, reflecting their reliability and responsible credit use. This aspect shows the importance of considering one’s repayment ability to ensure the loan is a financial stepping stone versus a burden.

Additionally, the market for personal loans has expanded, offering a range of products tailored to varied credit profiles and financial needs. Online lenders, in particular, have emerged as a significant segment, often providing faster approvals and funding than traditional banks. 

This accessibility has made personal loans more competitive, benefiting consumers with more options and potentially lower rates. 

Tip

Borrowers should be diligent in comparing offers, considering not just the interest rates but also any fees, the flexibility of repayment terms, and the lender’s customer service and reputation.

By carefully selecting the right personal loan, borrowers can leverage these financial tools to achieve their goals while maintaining or improving their financial health.

Cash advance features

Cash advances have diversified beyond traditional credit card advances, including options from payday lenders and financing apps. This evolution provides immediate cash to those in need, especially useful for unexpected expenses like emergency repairs or funding needs. 

These options have broadened access, benefiting those with lower credit scores or unstable incomes, making it a critical financial resource in emergencies.

However, the convenience of cash advances comes with some costly and varied tradeoffs: 

• High costs: Cash advances can come with steep costs. For instance, you’ll often pay a credit card cash advance fee. Plus, you’ll pay interest on the balance. Per recent Federal Reserve data, average annual interest-bearing credit card rates were 22.75% versus 12.35% for a 24-month personal loan. 
• Debt cycle risk: Easy access and rapid funding can lead to getting yourself into a cycle of borrowing that’s difficult to escape.
• Credit score impact: The effect on your credit score can vary widely depending on the cash advance source. In many cases, credit checks aren’t required. However, it may indirectly affect your credit score, such as by increasing your credit utilization ratio. 

Traditional credit card advances usually have a transparent fee structure and defined impact on credit utilization. In contrast, payday loans and financing apps might not be as transparent, with some not reporting activity to credit bureaus, affecting your ability to build or improve your credit score.

Given these points, cash advances should only be considered a last resort. Alternatives like personal loans, borrowing from friends or family, or negotiating payment plans for bills might offer more financially sound solutions. 

Plus, the potentially high interest rates and fees associated with cash advances can quickly lead to a debt trap that is challenging to escape. For these reasons, it’s best to avoid the long-term use of high-cost borrowing. 

Personal loan pros and cons 

Some of the pros and cons of a personal loan compared to a cash advance are shown below:

Pros

• Lower interest rates make borrowing more affordable.

• Fixed repayment terms aid in financial planning.

• Timely payments can improve your credit score.

Cons

• Approval and funding can take several days.

• Requires good to excellent credit for the best terms.

• Potential fees for origination and late payments.

Cash advance pros and cons

Some of the pros and cons of a cash advance compared to a personal loan are shown below:

Pros

• Immediate access to funds, often within the same day.

• Accessible to those with less-than-perfect credit.

• Varied sources, including credit cards, payday lenders, and apps.

Cons

• High fees and interest rates increase the cost of borrowing.

• Can negatively impact credit utilization and score.

• Lack of fixed repayment schedule can lead to prolonged debt.

When to use a cash advance vs. a personal loan

Understanding the appropriate circumstances for utilizing a cash advance versus a personal loan is crucial for financial management. 

With their lower interest rates and fixed repayment schedules, personal loans are typically better suited for larger, planned expenses. Cash advances offer immediate liquidity but at a higher cost and should be cautiously approached. 

Here’s a guide to help you decide which option aligns with your financial needs and situations.

Scenario	Personal loan	Cash advance
Large, planned purchase	✅
Consolidating high-interest debt	✅
Home renovation project	✅
Wedding expenses	✅
Unexpected expense	✅
Urgent emergency funding		✅

Large, planned purchase

Personal loans are ideal for significant, non-urgent purchases like electronics or furniture. Thanks to their lower interest rates and fixed monthly payments, they are a more affordable means of managing large expenses. 

Additionally, the ability to borrow a larger amount with a personal loan versus lower cash advance limits makes it easier to finance big-ticket items without straining your finances or needing to save up for months in advance.

Consolidating high-interest debt 

Consolidating high-interest debt (like cash advances) into a single personal loan can reduce your interest burden and simplify your finances. The lower interest rates and single monthly payments associated with personal loans make them a smart choice for debt consolidation. 

Implementing this strategy can lower your monthly payments and improve your credit score. It achieves this by reducing your credit utilization ratio and establishing a good payment history, contributing to a more favorable credit score.

Home renovation project 

Personal loans are well-suited for funding home renovation projects. They offer the upfront funds needed for such large endeavors and come with repayment terms that can make a big project financially manageable over time. 

This financing option allows homeowners to increase their property’s value while enjoying the renovation’s benefits without waiting years to accumulate the necessary funds. It would not be appropriate to use a higher-cost cash advance for this type of funding need.

Wedding expenses

For couples planning their wedding, a personal loan provides a sensible way to cover the ceremony, reception, and honeymoon costs without dipping into savings or using high-interest credit options.

This approach allows for celebrating without the immediate financial strain, thanks to lower interest rates and structured repayment plans. Plus, the financing can be tailored to fit the couple’s budget and needs, ensuring the dream wedding doesn’t jeopardize their financial health.

It would generally not be appropriate to use a higher cost funding option, like a cash advance, for this type of funding need. 

Unexpected expense 

A personal loan can be a cost-effective choice for significant but non-immediate unexpected expenses, such as major car repairs or replacing essential appliances. It offers lower interest rates and a predictable way to manage sudden financial needs while maintaining long-term financial stability. 

By choosing a personal loan over other high-cost forms of credit – like a cash advance – you can cover non-urgent unexpected costs efficiently without disrupting your budget or financial plans. If you’re facing an emergency and can wait for funding, it can also be a viable option.

Urgent emergency funding 

A cash advance can be helpful in urgent emergencies where immediate access to funds is critical. However, due to high interest rates and fees, it should be considered a last resort. It’s suitable for situations demanding swift financial response, like emergency travel or urgent repairs. 

Always have a repayment plan to avoid using too much debt. Utilizing a cash advance should be done with the understanding that the funding speed comes at a premium, and it’s vital to repay it as quickly as possible.

Ask the expert

Michael Menninger

CFP®

There are very few legal cash needs requiring immediate funding. For purchases, you can charge something to your credit card to avoid a fee. If you pay your bill every month, you’ll also avoid interest. Cash advances are the last choice.  Borrowing from a family member, friend, or employer should come before that.

Alternatives to personal loans and cash advances

A personal loan vs. cash advance might not be your only option. Evaluate whether these alternatives make sense for your situation. 

Salary advance

With a salary advance, your employer provides an advance on your next paycheck. This can be beneficial because it doesn’t typically involve borrowing costs, unlike personal loans and cash advances. However, salary advances can leave you short on funds for your next pay period, a potential drawback to consider.

Retirement loan 

Compared to personal loans and cash advances which can be expensive due to high interest rates, retirement loans can offer a lower interest rate because you borrow from your retirement fund. The downside is that it can affect your retirement savings over time. If not repaid on time, it can lead to financial penalties.

Credit card 

Credit cards can be an alternative if immediate liquidity is not a concern. Unlike personal loans and cash advances, which give you a lump sum, credit cards provide a line of credit you can draw from as needed. 

The interest only accumulates on the amount you’ve used, sometimes offering more flexibility. However, higher interest rates and the temptation to overspend can become major drawbacks if not handled wisely.

By understanding these alternatives, you can make a more informed decision about whether a personal loan or cash advance is your best option.

FAQ

What determines my eligibility for a personal loan or cash advance?

Eligibility for a personal loan or a cash advance varies by lender. Lenders typically consider your credit score, employment status, income level, and current debts. Most lenders outline their borrowing criteria, making it easier to evaluate eligibility.

Are any hidden fees associated with personal loans or cash advances?

Personal loans and cash advances can have additional costs or fees, including origination fees, late payment fees, and prepayment penalties. It’s smart to read the loan agreement before signing, so you know all the charges associated with your loan.

How do personal loans and cash advances affect my redit score?

Personal loans and cash advances can affect your credit score. Taking a new credit line can cause a temporary drop in your score. However, on-time loan repayments can help your score improve over time. Defaults or late payments can harm your credit score.

Can I repay a personal loan early or refinance a cash advance?

Repaying a personal loan ahead of schedule could save you on interest. It’s essential to check whether your lender charges an early repayment fee. (Most don’t.) Refinancing a cash advance is possible, depending on your credit card company. 

Refinancing a high-interest cash advance could lead to paying more over the long term. Double-check the terms and conditions with your lender before proceeding.