Dubai: If you are a credit card holder, you would likely face the choice of taking a cash advance or a loan on your card. While they are similar in a lot of ways, they have distinct differences that may make one more suitable for you than the other.
While credit card loans are pre-approved loans extended to you based on your credit card usage, repayment, and history, with a credit card cash advance, you are essentially withdrawing cash from your credit card account, which is typically up to 50 per cent to 90 per cent of your credit limit.
“Compared to cash advances, which require minimal documentation, a loan on credit card is offered for a longer term, based on your credit history and repayment record,” said Essam Kabeelali, an Abu Dhabi-based credit advisor. “But with such loans, it’s crucial to first gauge how it’s paid back.
“You must pay back the loan in easy monthly instalments (EMIs) over the tenure chosen. These instalments are charged to your monthly credit card statement, and you must pay it by the due date. In most cases, the instalment amount is included as part of your monthly credit card spending limit.”
If you don’t pay the dues after a stipulated period, Kabeelali warned of having to pay high interest charges on your outstanding balance to prevent your credit card from being blocked. “This lowers the likelihood of you getting any other loan at a favourable rate in the near future,” he added.
How are credit card loans different from a cash advances?
A key difference between credit card loans and cash advances is when you opt for cash advances, you’re borrowing a percentage of your credit card limit, as indicated above. However, with credit card loans, you can borrow from 10 times to up to 15 times of your borrowing limit.
With a credit card cash advance, you get access to needed funds, but there are some major downsides. "You’ll be on the hook for cash advance and ATM fees, along with interest that accrues the moment you get the money,” explained Rajesh Markara, another Abu Dhabi-based debt advisor.
“Cash advances generally have a transaction fee, typically around 3 per cent, and a higher annual percentage rate (APR) compared to credit card loans. Additionally, there’s usually a limit on how much cash you can get an advance on, and you may also incur an additional minimum fee of Dh50.”
For example, a 24 per cent APR on a credit card is another way of saying the interest you're charged over 12 months is equal to roughly 24 per cent of your balance. If the APR is 24 per cent and you carry a Dh1,000 balance for a year, you owe around Dh236.71 in interest by the end of that year.
A cash advance is a one-time withdrawal intended for short-term cash needs, such as emergencies, and carries a higher interest rate than regular credit card purchases. However, a loan on a card is for larger expenses like consolidating debt and comes with a lower interest rate than cash advances.
Can credit card loans benefit you more than cash advances?
Banks charge a higher interest rate on cash advances and additional fees, which makes it more difficult for customers to pay off the loan on time. Additionally, cash advances are not typically reported to credit bureaus, which means they will not improve a customer’s credit score.
“While the loan amount on a credit card varies on the borrower’s creditworthiness, the interest rate on a credit card loan is lower than the rate on a cash advance and there is a processing fee for taking out a loan on a card,” added Kabeelali, when explaining why loans are preferred over advances.
Your creditworthiness is also measured by your credit score, which is a three-digit number from 300 to 850 based on factors in your credit report. A high credit score means your creditworthiness is high, while a lower credit score indicates lower creditworthiness.
“Repayment is usually required over a longer period, such as several months or years. However, there is a downside with loans. It should be remembered that loans on cards typically require a more extensive application process than cash advances,” he said.
This means customers will need to provide additional documentation, such as proof of income and employment. Additionally, loans against your credit card limit may also have a longer processing time, which means customers will have to wait longer to receive the loan.
While a loan on a credit card allows cardholders to convert their available credit limit into a loan, a cash advance allows cardholders to withdraw cash using their credit card at an ATM or bank branch. It is then added to the cardholder’s balance, and interest is charged on the amount withdrawn.
“Both cash advances and loans on a card have their own advantages and disadvantages, a cash advance is a good option for those who need cash quickly and can pay it back within a short period,” added Markara.
“On the other hand, a loan on a card is a better option for those who need a larger amount of money and can pay it back over a longer period. In the end, the choice between a cash advance and a loan on a card will depend on the individual’s specific financial needs and situation.”
Both features are offered to eligible cardholders, and the loan amount can be used for a variety of purposes, such as consolidating debt, making large purchases, or covering unexpected expenses. The loan-on-card feature typically comes with a lower interest rate compared to a cash advance.
However, as always, it is advisable to read the terms and conditions, interest rates and fees, and charges of any loan or cash advance before making any decision. Also, consider one’s ability to repay the loan, as failure to do so can negatively impact credit score and lead to financial difficulties.