Cash Advance vs Personal Loan: How to Choose

A cash advance is a short-term financing option with very high interest rates, while a personal loan is a longer-term financing option with lower rates.

A cash advance and a personal loan are both ways to borrow money. While a cash advance is a short-term high interest loan, often used to cover emergency expenses, a personal loan usually has lower rates in comparison, and is paid back over a longer period of time.

Deciding whether a cash advance or personal loan is best for you will depend on how quickly you need the money, how much you need to borrow, and your personal credit profile.

Cash advance and personal loan overview

When you need money to cover an unforeseen expense, two common options to access funds are a cash advance or a personal loan.

Cash advance definition

A cash advance is a small, short-term loan that often comes with a high interest rate and/or fees. It’s generally intended to be paid back quickly, often within a matter of days or weeks.

In Canada, common types of cash advances include:

Payday loan.
Credit card cash advance.
Merchant cash advance (for business owners only).

How a cash advance works

A cash advance is designed to provide quick access to funds. Cash advances are most often used by those who don’t have the time to go through the application process for typical loan or line of credit.

To take a cash advance from a credit card, you’ll withdraw money from an ATM using your card. Or, if your credit card is with a provider like a bank with a brick-and-mortar location, you can go in person to withdraw money.

Unlike when you charge a purchase to your card, the interest on a credit card cash advance starts accruing immediately, which is why important to approach this option with caution. Cash advances are typically charged a higher interest rate than purchases charged to your card and additional fees may also be imposed.

Cash advances are also available from alternative lenders, like payday loan companies. You can apply online or in person and get a sum of money (generally not more than $1,500). These cash advances are generally expected to be paid back by your next payday — hence the name. Interest rates (sometimes simply referred to as fees) are incredibly high on these types of cash advances and can lead to financial trouble if you aren’t able to pay back the entire amount in the time allotted.

The 2023 federal budget proposes an amendment to the Criminal Code that lowers the maximum interest rate cap from 47% to 35% annually. The budget also aims to eliminate current legislative loopholes that allow payday lenders to charge prohibitively high interest rates on their loans. If put into effect, payday lenders will be permitted to charge no more than $14 per $100 borrowed.

Personal loan definition

A personal loan is a lump sum of money offered by a lender, like a bank, credit union or alternative financial institution. Personal loan funds can be used for whatever you like, but you are required to pay back the amount with interest on a set schedule over a predetermined loan term.

How a personal loan works

Personal loans are paid back according to the timeline outlined in your loan agreement. Interest rates may be fixed or variable, and repayment terms generally range from one to seven years, depending on your lender.

Cash advance vs personal loan

	Cash advance	Personal Loan
Common types	Credit card cash advance, payday loan, merchant cash advance (for businesses).	Secured and unsecured loans. Debt consolidation loans. Home improvement loans. Retirement savings loans.
Uses	Emergency expenses or purchases that can't wait for a loan approval.	Consolidating debt, buying a car, paying for school expenses, making home repairs or improvements, covering emergency/unforeseen expenses.
Where to get	From an ATM using your credit card, in person at a bank or via a payday loan provider.	Banks. Credit unions. Some alternative lenders.
Typical loan limits	Credit card providers may limit cash advances to 30% or 40% of your credit limit. Payday loans can offer $120 to $1,500, though amounts will vary by lender.	Up to $50,000, depending on lender.
Typical interest rates	Credit card cash advances often have APRs around 22% but can be higher; interest rates for a payday loan average 540% APR but can be as high as 780%.	Around 10% on average, depending on credit profile.
Typical qualification requirements	For credit card cash advances, there are no additional qualifications once you have the credit card. For payday cash advances, you may have to be the age of majority in your province or territory, show proof of income and have a chequing account	Credit history and score, age of majority, permanent address, proof of employment and income.
Typical payback terms	For payday loans, you're usually required to pay back the money on your next payday.	From one to seven years, depending on provider.

Cash advance vs personal loan: Which is right for you?

Here are some points to consider when choosing between a cash advance or a personal loan.

Urgency. The approval process for a personal loan is usually longer than getting a cash advance, which can be as simple as finding the nearest ATM, if you use your credit card.

Your credit score. While it’s possible to get a personal loan even if you have a low credit score, it may be easier to get approved for a cash advance at a payday loan provider. Or skip the approval process entirely by using your credit card to get a cash advance.

How quickly you can pay back the debt. Because the interest rates for a cash advances are so high, it can quickly spiral into a much larger debt. Before you use one, make sure to have a plan for repaying it, along with interest and fees.