In this article we'll be explaining how expensive a cash advance really is, in terms of its interest rates. This is something which some people have some confusion about, which is not surprising because the advertised interest rates are often actually higher than what you have to pay. That's because of a problem with displaying the APR prominently.
The APR
There are two things that you have to know if you are going to understand why the APR is not representative of how much you are going to be charged for a cash advance. One is that these are short term loans which are designed to last for about a month. The other is that the Annual Percentage Rate measures how much interest you'd have to pay in a year.
With the majority of conventional loans, that is long term loans that last for at least a year, it certainly is useful to know the APR. Because that way you can calculate how much you're going to have to pay each year, which is helpful when you're considering your accounts. If the loan doesn't last a year though it just tells you how much more you take that much longer to repay the loan.
Of course most people understand that the APR is not what they are going to have to pay if they do pay back the loan on time but they still don't understand why the APR should be that high. That is because they have the mentality surrounding long term loans though, in which case a year would only be a fraction of the length of the loan. Whereas with a loan that lasts for a month, a year represents 12 times longer than the length of the loan.
The problem here then is using months and years as fundamental units of times, whereas they are really quite arbitrary and not universally useful. In this case what we have to do instead is use the length of the loan as the unit of time that we are using. So a year is 12 times longer than a month, which is the relationship between the APR and cash advances. To compare this to a 2 year loan then, the equivalent of the APR would be the amount of interest you'd have to pay after 24 years.
Actual Interest Rates
With the above analysis then you should see why using the APR is not a helpful way of judging how expensive a cash advance is. Instead, the best thing to do is simply look at the total amount that you are going to be charged for the loan. It all has to be paid back in one go when you're next paid after all so you might as well.
At this point of course no universal statements can be made as it is up to each individual lender how much they charge so you are just going to have to check out different providers and see what the fee is. If you find a provider offering around 25% though, that is a good rate. Again, we can compare that with long term loans directly by seeing how much they charge overall.
There are going to be large differences in the amount you are going to be charged overall by long term lenders due to the fact that their loans not only come with different interest rates but they also last for different amounts of time. For instance if you have a loan that lasts for 2 years at 15% APR, that will be 30% overall. Whereas if you have a 5 year loan at 20% that's 100% overall. Clearly then, a short term loan at 25% is actually quite good.
The APR
There are two things that you have to know if you are going to understand why the APR is not representative of how much you are going to be charged for a cash advance. One is that these are short term loans which are designed to last for about a month. The other is that the Annual Percentage Rate measures how much interest you'd have to pay in a year.
With the majority of conventional loans, that is long term loans that last for at least a year, it certainly is useful to know the APR. Because that way you can calculate how much you're going to have to pay each year, which is helpful when you're considering your accounts. If the loan doesn't last a year though it just tells you how much more you take that much longer to repay the loan.
Of course most people understand that the APR is not what they are going to have to pay if they do pay back the loan on time but they still don't understand why the APR should be that high. That is because they have the mentality surrounding long term loans though, in which case a year would only be a fraction of the length of the loan. Whereas with a loan that lasts for a month, a year represents 12 times longer than the length of the loan.
The problem here then is using months and years as fundamental units of times, whereas they are really quite arbitrary and not universally useful. In this case what we have to do instead is use the length of the loan as the unit of time that we are using. So a year is 12 times longer than a month, which is the relationship between the APR and cash advances. To compare this to a 2 year loan then, the equivalent of the APR would be the amount of interest you'd have to pay after 24 years.
Actual Interest Rates
With the above analysis then you should see why using the APR is not a helpful way of judging how expensive a cash advance is. Instead, the best thing to do is simply look at the total amount that you are going to be charged for the loan. It all has to be paid back in one go when you're next paid after all so you might as well.
At this point of course no universal statements can be made as it is up to each individual lender how much they charge so you are just going to have to check out different providers and see what the fee is. If you find a provider offering around 25% though, that is a good rate. Again, we can compare that with long term loans directly by seeing how much they charge overall.
There are going to be large differences in the amount you are going to be charged overall by long term lenders due to the fact that their loans not only come with different interest rates but they also last for different amounts of time. For instance if you have a loan that lasts for 2 years at 15% APR, that will be 30% overall. Whereas if you have a 5 year loan at 20% that's 100% overall. Clearly then, a short term loan at 25% is actually quite good.
About the Author:
Should you do have some interest in obtaining emergency cash, and you want some more info about getting it, Kian Ross also regularly writes at cash advances.
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