Cash Advance – How Does It Work?

If you want a cash advance or a payday/paycheck loan, you usually get a personal check. Some companies use your bank account or credit card in addition to or instead of a check. This means that you have to write a check that is to be cashed or you have to agree to have an amount withdrawn from your bank account at a certain date in future (usually 14 days). After filling-in the agreement or contract you get a sum of money that is less than what you have agreed to pay. The sum is smaller because the difference is the "fee" for the loan service. Why would the company loan you money like this? Because loaning out money in this way and getting these "fees" really brings them a huge profit at your expense.

If we assume that you borrow $200 and the "fee" is of $15 for each $100, within 14 days you will have to give back $230 for the $200 that you borrowed. If by borrowing the $200 you avoid paying a $100 late fee or penalty on something, then it is worth the effort. But if you just need the money for yourself, the price is too high.

Simple math shows you that you are paying 15% interest for a 14-day loan. That means 3785 dollars compounded interest per year. So now you can understand why lenders are so very happy to give you the money. If they loan you $100 and you pay them back $15 more in only two weeks and they loan out the $100 again along with the $15 they got from you, by doing this for one year, they will turn their $100 into $3785. This is the proof you needed that it's better to lend them your money than to borrow from them.