Bad Credit Loan or Cash Advance: which is the right choice?

With inflation outpacing income growth, many Canadians are faced with financial strain, which is further exacerbated by unforeseen emergencies and mounting debt. Financial emergencies can be particularly challenging for those with bad credit as their options are limited. 

In such scenarios, a cash advance or bad credit loan can offer some financial relief. Both options can be lifelines in an emergency, admittedly with distinct terms, risks, and implications. The question is, which one is best for you: a bad credit loan or a cash advance?

Key Points

• While bad credit loans are best for large expenses, cash advances are best for small unexpected emergencies. 
• Both bad credit loans and cash advances have high interest rates, however, there are options for no-interest cash advances such as Bree. 

Bad Credit Loan or Cash Advance: What Are They?

Understanding what each option offers is key to understanding what’s ideal for your financial situation. 

What Are Bad Credit Loans?

A bad credit loan is designed for borrowers with credit scores under 580 to 620. These loans are easier to qualify for because, unlike traditional lenders that require good credit, these lenders accept less-than-perfect credit and look at other factors as part of the application process, including your income.  

Aside from the bad credit aspect, bad credit loans work similarly to standard personal loans. Your lender will give you a lump sum of money (usually up to $50,000) which you'll repay via installments over a set term (6 to 60 months). The funds can be used for a variety of purposes. 

Types Of Bad Credit Loans

• Secured Bad Credit Loans - A secured bad credit loan is backed by a valuable asset. This collateral reduces the risk for the lender. If you miss your loan payments, your lender can seize your asset and sell it to recoup their losses. Because of this lower risk, a secured loan may be easier to get approved for and may come with a lower interest rate. 
• Unsecured Bad Credit Loans - Unlike a secured loan, an unsecured bad credit loan does not involve collateral. That means there's no asset of value backing the loan. As such, this type of loan is riskier for lenders because there is nothing to repossess. However, your lender could sell the loan to a collections agency to recoup what you owe if you default on your loan. Because of this higher risk, unsecured loans may come with a higher interest rate compared to unsecured loans. 

What Is A Cash Advance?

A cash advance is a quick, short-term loan that provides a lump sum of money, often instantaneously. However, loan amounts are usually smaller than traditional personal loans. 

Cash advances come with very high interest rates, making them more expensive than conventional loan types. The funds from a cash advance typically must be repaid quickly, often within a few days or weeks. 

Common Types Of Cash Advances

• Credit Card Cash Advance - A credit card cash advance involves borrowing money against your credit card. You can withdraw money from your account within your credit limit at an ATM. Credit card cash advances are very convenient because you can get instant funding whenever you need extra money. However, cash advance interest rates are higher compared to rates for regular credit card purchases, and the interest starts to accrue right away. 
• Payday Loan - A payday loan is a short-term loan that provides small loans up to $1,500. Funds are provided shortly after application and must be repaid by your next paycheque (usually between 14 to 30 days after loan approval). While payday loans are easy to qualify for, even with bad credit, they are very expensive and should only be used as a last resort. 

Best Cash Advance Option: Bree No-Interest Line Of Credit

Bree offers an interest-free credit line that allows borrowers to access up to $350 quickly. No credit check is required, and funds are accessible in as little 2 days after approval, or instantaneously for a small fee. 

Bree’s quick credit line is great because it not only provides you with funds very quickly but charges no fees or interest. Moreover, Bree offers a budgeting tool to help you track and manage your finances better. They also have weekly newsletters that inform consumers on different financial topics.  

Bad Credit Loan Or Cash Advance: Which Is The Right Choice?

Bad credit loans and cash advances each have their own set of pros and cons, and one may be better suited for certain borrowers than the other. So, which one makes the better option for you?

Cash Advance: Best For Instant Cash And Small Emergencies

A cash advance may be a better option for you if you're in urgent need of money and don't have the time to go through the traditional loan process. Whereas a traditional loan could take up to a week for loan approval and funding, a cash advance can provide you with immediate access to cash.

Cash advances are also best for small emergencies as interest rates are often high and the loan amounts are small. 

Why a cash advance is better than a bad credit loan:

• Fast. A cash advance is great for emergencies. In many cases, you can get approved and funded on the same day. Bree, for instance, offers the option to fund your account in as little as 2 days or instantly for a small fee.
• Low to no requirements. You don't need good credit or a high income to qualify for a short-term cash advance. This makes these loan types easy to get approved for despite your financial or credit profile.
• No interest options. Cash advances are no longer limited to payday loans and credit card cash advances, other lenders like Bree exist. Bree offers a quick line of credit of up to $350 with no interest. This can help you save money that otherwise would have been spent on interest, which is typical of other loan types and lenders. 
• Avoid NSF Fees - If you have a payment coming up but don’t have the funds to cover it, a quick cash advance, particularly a no-interest one from Bree, can help you avoid expensive NSF fees.

Bad Credit Loan: Best For Large Expenses

A bad credit loan may be a better choice for you if you need to borrow a large amount of money but don't meet the credit requirements for a traditional loan. These loans may be ideal to cover expensive purchases or expenses or to consolidate high-interest debt.

Why a bad credit loan is better than a cash advance:

• Higher loan amounts. If you need thousands of dollars to cover a large expense or to consolidate your debt, a bad credit loan may be more appropriate than a cash advance. 
• Longer payment periods. You can spread out the cost of your bad credit loan over a longer repayment term. This can help keep your installment payments low and more budget-friendly. 

Bad Credit Loan Or Cash Advance: Things To Watch Out For

Whether you choose to take out a bad credit loan or a cash advance, there are certain drawbacks to each that you should be aware of. 

Drawbacks Of Cash Advances 

• High interest. The trade-off for immediate access to funds through a cash advance is that these loan types are very expensive. Cash advances typically come with super high interest rates, making them a costly option, particularly if you opt for a payday loan or a credit card cash advance. However, you may be able to avoid such costs by opting for Bree's interest-free line of credit.
• Lower loan amounts. Cash advances are meant to provide a quick cash fix. They typically don't offer high loan amounts. Generally speaking, cash advance limits don't exceed a few hundred dollars.
• Fees. Depending on the type of cash advance you take out, you could be charged an additional cash advance fee on top of the interest. For instance, tapping into your credit card account for cash could cost you either a flat fee or a percentage of the amount you're withdrawing.

Drawbacks Of Bad Credit Loans

• High interest. Like cash advances, bad credit loans can come with high interest rates simply because of the low credit score requirements. While you may be able to secure a lower rate compared to a cash advance, the rate on a bad credit loan is still typically higher compared to traditional loans. 
• Fees. In addition to the high rates, bad credit loans may also come with higher fees compared to traditional loans from conventional lenders. This can make your loan more expensive.  
• Collateral requirements. If you apply for a secured bad credit loan, you're putting a valuable asset at risk if you default. As long as you keep up with your payments, you'll be fine. But if you miss payments, your collateral could be seized by your lender. 

Final Thoughts

Cash advances and bad credit loans each serve specific purposes. If you have a small emergency and need cash immediately, then a cash advance may be worth considering. However, if a larger loan amount is in order, a bad credit loan might make more sense. Regardless, both options can be valuable to those with bad credit or those in a financial emergency. Whichever route you choose, make sure to weigh the pros and cons of each to make the best decision for you.