You might encounter situations where you’re in urgent need of cash, and your checking and savings accounts don’t hold a sufficient balance. Your debit card may not have the necessary funds either. In such moments, the thought of using your credit card at an ATM for a cash advance might cross your mind. However, caution is advised as it can come at a significant cost, and there are potentially better alternatives.
It’s essential to fully understand what you’re getting into. Cash advances, while convenient, can be exceptionally expensive, even for relatively small loan amounts. Unless you require immediate access to cash, we recommend exploring alternative options, such as personal loans. To illustrate the substantial cost difference with concrete figures and examples, we’ve provided a case study below.
Comparison of Personal Loans and Cash Advances: A Comparison
Let’s consider Alex who needs immediate access to S$3,000 in cash. He’s pondering whether to opt for a personal loan or simply head to an ATM and use his credit card for a cash advance. S$3,000 isn’t an excessively large sum for him to handle as a loan, and he’s leaning towards spreading the repayment over a year. Let’s delve into the practical implications of these options.
Based on research, the average cost of a personal loan in Singapore hovers around 6.99%, excluding a one-time processing fee that typically ranges from 2% to 4%. Since personal loans entail fixed monthly payments, Alex would need to cover a monthly interest of S$17 (S$3,000 x 6.99% divided by 12 months), along with a principal repayment of S$250 (S$3,000 divided by 12 months), resulting in a total monthly payment of S$267. Over the course of 12 months, Alex would end up paying a total of S$3,267, inclusive of the initial S$3,000 borrowed and S$267 in interest.
Conversely, the scenario for a cash advance presents a significantly bleaker outlook. According to the findings, the average cost of a cash advance in Singapore is approximately 28%, excluding a one-time fee of 5-6%. This rate already surpasses the typical 25% charged by credit cards in Singapore and is nearly four times higher than the interest rates offered by personal loans. If you attempt to manage this debt using a similar approach to the one we detailed for a personal loan, you’ll encounter substantial challenges.
To begin with, not only are you dealing with a higher interest rate, but you’re also subjected to daily interest charges on the cash advance, commencing from the very first day. Consequently, your initial month’s payment includes an astonishing S$70 in interest alone.
Even as you consistently make monthly payments of S$250 (S$3,000 divided by 12 months) in addition to interest, you’ll find it exceedingly difficult to reduce your loan balance over the course of a year due to the substantial interest accumulation.
Adding to this disparity, let’s consider the application or processing fees associated with these options. Personal loans typically entail processing fees ranging from 2% to 4%, although sometimes they come in the form of a fixed payment ranging from S$80 to S$200.
In contrast, cash advances impose a 5-6% fee or a minimum of S$15, whichever is higher. Even if we assume a personal loan carries a fee of S$120, this amounts to roughly 4% of the principal of S$3,000, which is significantly lower than the 5-6% fee associated with cash advances, which can be as high as S$300.
Read Also: Top 5 Reasons Why Cash Advances on Your Credit Card Can Be a Financial Trap
As illustrated in our example, a personal loan emerges as the far more favourable choice for accessing cash when compared to a cash advance. However, it’s important to note that personal loans typically require a few hours or a day for approval, and they may not offer the flexibility of rapid repayment at will.
Consequently, cash advances could still be a viable option for individuals urgently in need of a few hundred dollars, especially if they can promptly repay the debt within weeks if not days.
When Should You Take a Cash Advance in Singapore?
Emergencies with No Other Options
A cash advance can be a last resort option if you’re facing a dire emergency and have absolutely no other way to get the cash you need immediately. For instance, if you have a medical emergency while traveling abroad and don’t have enough in your bank account, a cash advance could help you pay for treatment upfront. However, given the high fees and interest rates, exhaust all other options like borrowing from family/friends or your emergency fund first.
Very Short-Term Needs with Quick Repayment
If you need a small amount of cash for a very short period and are certain you can repay it in full within a couple of weeks, a cash advance may be tolerable. The high costs won’t have as much time to accumulate.
When Traveling Without Access to ATMs
When you’re traveling, especially in remote areas abroad, you may find yourself needing local currency but without easy access to an ATM that accepts your card. In such situations, getting a cash advance at a bank using your credit card could help you obtain the cash you need to get by until you reach an area with ATMs. However, try to minimize the amount and repay it as soon as you can.
When Should You Take a Personal Loan in Singapore?
Consolidating High-Interest Debt
If you have multiple high-interest debts, such as credit card balances, taking out a personal loan with a lower interest rate to consolidate those debts can help you save on interest and simplify repayment. By consolidating, you’ll have just one monthly payment to manage. However, be sure to look for a personal loan with an interest rate meaningfully lower than your existing debts for this to make sense.
Funding Necessary Large Purchases
Personal loans can provide the funds you need for important large purchases, such as a car to get you to work, appliances you need after moving, or supplies to start a small business. By spreading the cost over a longer term with fixed monthly payments, a personal loan can make important purchases you can’t put off more manageable. Just be sure you’re borrowing for a worthwhile purpose and have a plan for repayment.
Handling a Temporary Tight Cash Flow Situation
If you’re facing a temporary cash crunch, perhaps due to a gap between jobs or an unexpected large bill, a small personal loan could help you bridge the gap. By borrowing only what you need and choosing a short repayment term, you can get the cash to handle your temporary tight spot without taking on a long-term debt burden. Look for lenders with low fees and competitive rates.
Covering Emergency Home or Car Repairs
When hit with emergency expenses like a leaking roof or a blown car transmission, a personal loan can give you a way to handle the cost and repay it over time. Since putting off such urgent repairs will often just lead to bigger expenses later, a personal loan may be preferable to just hoping you can save up the cash before the problem worsens.
So, What to Choose?
In contrast to cash advances, personal loans offer a highly advantageous option for addressing your financial emergencies, provided you can afford to wait a day or two.
With their low-interest rates and predictable fixed monthly payments, personal loans serve as a far superior solution to finance substantial emergency expenses. If you’re interested, we’ve compiled a list of the top personal loan options in Singapore to simplify your decision-making process.
