A cash advance is a loan taking out against a line of credit. Credit cards are not the only things that can be used for cash advances. Some debit cards have a cash advance feature. A bank processes the debit card as a credit card and provides a consumer with cash.
Many banks do not charge anything for the physical transaction and debit cardholders can take a cash advance up to a predetermined limit. This makes it easy for people to get cash quickly, even if they do not have the money in their bank accounts.
It is very difficult to find sources of free money in this world and the debit card cash advance is definitely not one of them. Debit card advances feature very high interest rates and an ATM fee may be incurred if the money is withdrawn through one of these machines.
However, sometimes there are no other alternatives so people must bite the bullet and use the debit card to take a cash advance. Based on what the money is being used for, this may or may not be a regrettable decision.
Take, for example, the instance of someone refinancing a home. The individual may not realize until the date of closing that a certified check, not a personal check, is required. Banks rarely permit their customers to deposit a personal check that will immediately be available to fund a certified check.
However, some banks do permit cash advances against debit cards. The individual can use this card to get the cash needed for creation of the certified check. If the advance is repaid as quickly as possible using the money in the account, the pain of the higher costs is minimal.
Debit Card Cash Advance Rates
Similar to credit card cash advances, an advance taken using a debit card has an associated interest rate. The rate is usually a certain percentage above the prime interest rate and may be 20 to 30 percent or higher. When annualized, the rate can be huge.
In addition, there is often no grace period for these interest charges, with interest accruing from the minute the advance is taken. Money from another bank account may be linked to the account associate with the debit card and used to fund a cash advance that exceeds the initial account balance.
Some individuals apply for an overdraft line of credit. In this arrangement, the bank commits to paying overdrafts up to a certain limit. An overdraft fee and interest are usually charged and only creditworthy consumers qualify for this arrangement. People with a poor credit history will not likely be able to establish this ongoing line of credit, forcing them to use their credit cards in other ways to obtain a cash advance.
Debit Card Cash Advance Fees
In addition to interest, a fee is charged to take a debit card cash advance. This fee is structured similarly to that for a credit card cash advance. It is usually a percentage of the amount advanced, subject to a certain dollar minimum.
A typical cash advance fee for a debit card is about three to five percent with a $10 minimum charge. Anyone needing an advance would be wise to calculate this fee prior to requesting the money. There may be a lower-cost source of borrowing, such as a loan from a friend or family member.
Every time a cash advance is taken against a credit card, this fee is charged. If a consumer takes a $500 advance, then realizes this was not enough money and takes another $500 advance, the fee is imposed twice. Anyone who frequently uses cash advances will quickly realize that the practice impacts the wallet. Aside from emergency situations, proper planning should help avoid such negative financial consequences.
Some banks approach the situation from a different angle, allowing the cardholder to withdrawal a certain amount of money from the bank account in excess of the account balance. An overdraft fee is charged for this service.
If there is a prior agreement regarding overdrafts and the amount advanced is within the authorized limit, a predetermined rate of interest is usually charged. If the advance amount exceeds the overdraft limit, a higher interest rate may apply and additional fees may be charged.
Providers
Fidelity is one institution that permits a cash advance against a Visa or MasterCard debit card. Fidelity money market fund account holders may take an advance subject to a certain limit and Fidelity does not charge for the cash advance.
If the receiving bank also does not charge for this transaction, people may be able to access money without incurring major expenses. Within several days, a money market fund sale of the appropriate amount is transacted to cover the negative balance from the core Fidelity account.
Some lenders offer debit card cash advances that mimick payday loans. Instead of depositing the funds into a bank checking or savings account, the lender loads them onto a debit card. The borrower can then use the card to make purchases, without the worry of carrying cash.
Similar to payday loans, these feature a huge interest rate and must be repaid within a short period of time, usually by the next paycheck. Payday lenders are continuously being accused of targeting consumers in already shaky financial situations. Some impose interest rates that equate to 3,000 APR or higher.
In the UK, Delta, Visa, and Switch account holders may be able to overdraw their bank accounts using a debit card. If they have an overdraft agreement and the amount falls within the permitted range, the agreed upon interest rate will be charged, which is usually lower than that associated with a credit card. If they do not have such an agreement, the interest rate is typically much higher than that associated with an overdraft agreement.
The situation is similar in the U.S., with many banks permitting overdrafts but charging for them. Bank of America, however, dropped its overdraft fees in 2010 and began declining any requests to withdraw money that exceeded the bank account balance.
Customers were the ones driving this change, to the displeasure of the bank, which made billions of dollars from overdraft fees. However, there are plenty of banks, including local institutions like Old National Bancorp in Evansville, Indiana, that actually encourage overdrafts.
Considerations Regarding A Debit Card Cash Advance
The high interest rate, lack of interest grace period, and fee make a cash advance one of the most expensive ways to finance debt. Though debit card cash advances provide cash quickly, consumers pay for such luxuries. Whether they have an account overdraft or take out one of the debit card cash advances that are similar to payday loans, individuals are likely to be slapped with either a cash advance fee, a high rate of interest, or both.
Even more unfortunate than this is the fact that many consumers do not read the fine print of their agreements. They do not become aware of these charges until after they have taken the cash advance. At this point, the fee has already been imposed, the interest clock has started ticking, and it is too late.
This is one reason that financial planners advise consumers to be well-informed before taking out any type of loan product, no matter how reputable the lender may seem.
Differing Opinions Regarding Debit Card Cash Advances
Many banks do not widely advertise overdraft programs using a debit card. They are mainly marketed to existing bank customers and have remained under the public radar. However, regulators on a state and federal level are now beginning to examine these. The Federal Reserve is exploring whether these programs should be covered by laws requiring banks to disclose credit costs.
Banks take issue with the claim that annual interest rates exceed those permitted by many state usury laws. They say that using APR to calculate debit card cash advance charges when account overdrafts are concerned is misleading.
The fee, they say, is more similar to a late fee for a credit card than it is to a loan. Even without a formal program, these institutions believe consumers would overdraw their accounts. Banks offering the programs say these allow consumers to avoid bouncing checks. Contrary to what Bank of America encountered, they claim customers view an overdraft program as a great service.
Critics are not convinced, pointing to the similarity between debit card cash advances and payday loans. In some cases, a payday loan may be even less expensive than an overdraft, due to is short repayment period. Financial experts opposed to overdrafts say that the program is designed to increase lender income from fees, not to help consumers get out of a financial bind.
On the surface, these programs appear legal, so regulators are usually unable to ban them.
Summary
Everyone should have a plan for getting access to cash in an emergency. Though a debit card cash advance may be included in that plan, it should not be the primary method. Friends, family members, and co-workers often make less expensive lenders.
If an individual is financially responsible, one of these parties should not balk at lending him or her the money.
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