Cash advance is useful if you know how to calculate its cost

Credit cards will often allow you get a cash advance for an emergency, or an urgent need, but how expensive are they really?

By: Phoenix Lee/

Cash advance on a credit card may be useful especially when you have excellent credit, and may need a little extra money – for example, for your daughter’s wedding. Most bank cards will offer cash advances with a cheque or by using the card to withdraw cash from an ATM machine, depending on the amount needed.

However, using your credit card to get cash advance is typically the most expensive way to borrow money using the card.

The interest rate for cash advances on a bank card are usually in the double digits and often as high as 20 per cent to 30 per cent. A better, less expensive option for you may be to apply for a personal loan at your bank or credit co-operative. If you have excellent credit, you should qualify for a loan with a much lower interest rate than what you would pay using cash advances from a credit card.

With the average cost of a wedding topping $20,000, the difference between a cash advance interest rate and a personal loan interest rate could translate into thousands of dollars in savings.

For example, a $20,000 cash advance at the low end of the interest rate scale of 20 per cent would cost you $9,213 in interest payments alone if you paid the balance due in four years. A personal loan with a much more reasonable rate of 10 per cent for the same $20,000 would cost $4,348 in interest charges over the four-year repayment period. That’s a savings of $4,865.

When we speak of cash advance, we should also speak of repayment. If you are planning borrow for your daughter’s wedding, you should have a plan to pay back. You should not move forward unless you know you will have the funds in the next three to five years to pay off the wedding debt.

Using the same example as above, the monthly payment for a four year, $20,000 personal loan at an interest rate of 10 per cent would be $507.25. Obviously, the payment would increase if you spend more than $20,000 and decrease if you spend less.

Before you take that cash advance, you should sit down with your daughter and determine a budget for her wedding based on what you can comfortably afford to pay off in a three- to five-year period. You should stretch the payment period out to no further than 60 months. It is a very natural inclination to give a daughter everything she wants, but what you borrow should be balanced between what she wants and what you are able to repay without getting into financial difficulties.

But if you have already made that decision to get a cash advance or borrow beyond your means, then you would have to consider debt consolidation. At first glance, it makes sense to consolidate various higher-interest balances into one monthly payment at a lower interest rate. It sounds great in theory, but even after consolidating, many people often find themselves slipping deeper into debt and are merely borrowing more money to pay off debt. They’re just “buying time”.

There are essentially three types of borrowing methods available. There are debt-consolidation loans, balance transfers to another credit card, and home equity loans or lines of credit. While any of these methods may help some people get a handle on high interest debts, many others only find temporary relief and are right back where they started. in debt and in need of a real solution for paying it off. Many Singapore residents who take out a home equity loan or other type of loan to pay off debt end up with the same or higher debt amount within two years.

The biggest myth about debt consolidation loans is that they’re easy to get. While these loans may promise a low rate and no-hassle solution, many people in debt don’t qualify for the advertised rate due to a high debt-to-income ratio or previous late payments on their credit report. Even if you do qualify for one of these loans, it doesn’t automatically translate to savings. So, before you sign on the dotted line, be sure that the costs of the new, bundled loan will truly be less than what you’re already paying various creditors.

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