Cash advances: Overview, definition, and example
What is a cash advance?
A cash advance is a short-term loan or credit that allows an individual or business to borrow funds upfront, typically using a credit card, line of credit, or a personal loan. The borrower receives the amount as cash, which can be used for any purpose, and the amount borrowed must usually be repaid with interest or fees. Cash advances are often associated with high interest rates, and they may come with additional fees compared to regular credit card transactions or loans.
For example, a person might use their credit card to get a cash advance at an ATM to pay for an unexpected expense, such as car repairs or medical bills.
Why are cash advances important?
Cash advances are important because they provide immediate access to funds, which can be helpful in emergencies or when cash is needed quickly. They are commonly used by individuals or businesses that need quick liquidity but do not have other immediate sources of funds, such as savings or a checking account with enough balance.
However, they are generally not recommended as a long-term financial solution due to their high-interest rates and fees. They are more suited for short-term needs when there are no other financing options available.
Understanding cash advances through an example
Imagine a business owner who faces an unexpected expense, such as urgent repairs to machinery, and does not have enough cash on hand. The business owner uses their business credit card to take a cash advance at an ATM to pay for the repair costs. While the funds are received immediately, the business owner is aware that the cash advance will come with high-interest rates, so they plan to repay it as soon as possible to avoid additional financial strain.
In another example, an individual may use a cash advance from their personal credit card to cover a short-term expense, such as paying for groceries, travel, or emergency bills. However, since cash advances often have higher interest rates than regular credit card purchases, the individual should pay off the balance quickly to minimize interest charges.
An example of a cash advance clause
Here’s how a cash advance clause might appear in a credit agreement:
"The Borrower may request a cash advance from the Lender up to a limit of $10,000, subject to the terms and conditions set forth in this Agreement. The Borrower agrees to repay the cash advance within 30 days, along with any applicable interest and fees, which will be calculated at a rate of 25% per annum on the outstanding balance."
Conclusion
A cash advance is a quick and convenient way to access funds in times of need, but it often comes with high interest rates and additional fees. While it can be an effective short-term solution for emergencies, it is important to carefully consider the costs associated with cash advances and repay them as soon as possible to avoid accumulating significant debt. For businesses and individuals, understanding the terms and costs of cash advances is key to using this financial tool responsibly.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.