Payday loan vs credit card cash advance

My niece asked me which is better when she occasionally comes up short at the end of the month.

  • Should I take a payday loan?          – or –
  • Should I take a cash advance on my credit card?

Certainly she should avoid both options if possible.  But if she must, credit cards offer lower interest rates than payday loans, so this seems like an easy call.  But it pays to look at the facts and compare the fine print.  If she pays off her credit card every month, the credit card cash advance is clearly the best solution; paying 15% interest (per year) beats paying 15% for a two week loan.

Her $500 cash advance will cost her $6.25 compared to $75.00 with a standard payday loan.

The agreement on the back of her credit card statement says cash advances carry a higher interest of 24%.

So it will cost $10; still not so bad.

Reading further we see that monthly payments are applied first to the (15%) regular purchases and only when these are paid off are payments applied to the (24%) cash advances.  What this means is that if instead of paying her credit card in full every month, my niece had always carried forward a balance of $500 or more, she will continue to pay the higher 24% interest on the first $500 of the balance.

When you start adding this $45.00 additional interest every year, the credit card may not be a good deal either.

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