4 Reasons to Avoid Cash Advances

Cash advance lending is one of the most controversial financial practices in the country. In fact, many states outlaw the practice all together because of the way it unfairly targets the most desperate borrowers. In areas where it is allowed, there are a number of problems that persist despite attempts to legitimize the practice. If you are considering a cash advance, think about these risks first.

#1 Expense

Cash advances come with incredibly high interest rates. The advances are secured with nothing but a paycheck, with makes them risky for the lender. Whenever a lender is assuming risk, she will want a promise of a greater profit. This concept of equalizing risk and potential reward is practiced in most lending and investment areas. With cash advances, though, the practice goes to the extreme. Lenders make loans to individuals who are not credit worthy by any standard. They do this time and again with multiple borrowers, aggregating their own risk of losses to a very high degree. The only way they can compensate for the high amount of defaults this creates is to generate a huge profit from the few borrowers who do pay off their loans.

#2 Lack of Regulation

Most lenders have to answer to regulatory bodies. These bodies, such as the FDIC, govern how a lender must carry out credit checks and other due diligence in order to extend loans. This protects investors in the institution from the possibility the lender will extend loans with a high risk of default. Ultimately, this reduces the overall risk both the lenders and borrowers are assuming in any transaction. With a cash advance lender, these regulations are absent. Most cash advance lenders ignore prudent lending practices and simply engage in the highest profit loans they can locate.

#3 Debt Cycles

Cash advances come due on one date in the near future instead of using a payment cycle. When a borrower cannot pay off a cash advance, which occurs very frequently, the lender will simply issue a new loan with finance charges and interest. The borrower make efforts to pay off this loan but cannot pay it off in full. The lender issues another loan, and the cycle continues. Most cash advance borrowers report a simple $100 loan can cost them as much as $500 when the cycle is finally closed. Larger loans can create an even longer and more detrimental cycle.

#4 Viable Alternatives

A final reason to avoid a cash advance is simple: there are alternatives. You can seek a personal loan from a bank using collateral, such as an auto title, that will be much cheaper than an advance. You will have to pass a credit check, which is why many borrowers shy away. If you pass, though, you will find much more flexible lending practices. Borrowers will even benefit from taking a personal loan from a friend or relative instead of using a cash advance. While it can be difficult to ask for money, ultimately, the embarrassment will be worth the much lower price tag and much safer practice.

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