Great Savings 17: Never Borrow From An ATM


The fees and interest on cash advances just aren't worth it.

Stop! Don't do it! Those cash advances are expensive.

If you’ve ever run short of cash, you’re first instinct may be to pull a credit card from your wallet and run down to the cash machine. Don’t do it! It turns out cash advance loans like these are extremely expensive.


The banks hit you from 3 different directions. It might help to think of it like a bump on the head, a chop to the neck, and a whack to the knees.


The Bump


Let’s start with the interest rate you pay for your cash advance loan. Rates on credit card loans run anywhere from 18-30% annually depending on the terms of your account. Ouch! To learn the exact rate you pay, check the statement the bank sent you in the mail or login online. Make sure you look for the rate referring to “cash advances”. This rate is typically higher than the rate you pay for purchases.


The Chop


Most companies also charge an upfront “cash advance” fee that runs about $10. Talk about adding insult to injury.


The Knees


They’ve already got you down, so why rub it in? Because they can! Let’s talk “grace” periods. Most credit cards offer a “grace” period before charging interest on purchases, providing you keep your account in good standing. That can make credit cards convenient if you pay the balance in full before the grace period expires. However, most credit card cash advance loans start accumulating interest immediately. In other words, there’s no grace period at all. This means the bank will sock you for those high interest rates from the get-go.



Our great savings tip series continues.So besides an arm and a leg, what’s a loan really cost? Let’s take an example and find out. Assume we need $100 cash so we run down to a local ATM to access our credit line. Also assume our bank charges 24% per year and we are only making minimum payments on our balance or 3% each month.


Creating a spreadsheet we set the following columns to calculate the results: In the first column we list the month. In the second column we have our beginning balance of the month. Note our $100 cash in hand starts out as $110 because of the $10 cash advance fee. In the third column we calculate interest. Note: A 24% annual rate amounts to 24/12 or a 2% monthly charge. In the fourth column we add our beginning monthly balance to the interest we calculated. In the fifth column we calculate a 3% minimum monthly payment. Finally, in the sixth column we calculate the month end balance by subtracting the payment from the subtotal. Note: This month’s ending balance is next months beginning balance.


The numbers don't lie.

Here's the cost of a $100 cash advance.



For brevity we didn’t show months 11 through 220 here. Also, we decided to pay the remaining $10 balance completely off in month 226.


So what does the example show us? First, it took us 226 months or an incredible 18.83 years (226/12) to pay off our $100 loan using the interest and payment rates given! Do you suppose we’ll remember why we borrowed it 18 years later? Second, that $100 we took out of the ATM cost not just a $10 fee, but $188.88 in interest charges. That’s a total cost of $198.88 or nearly $200. Wow, that’s almost twice the amount we received up front. Note: To calculate total interest charges we summed up the interest column.


Is this example reasonable? Unfortunately, it probably underestimates the cost of many credit card loans as the interest rates paid will be higher and as credit card users will take out larger cash advances.


The bottom line: (1) Don’t take out a credit card loan if you can possibly avoid it. (2) Pay your credit card loans off as soon as you can to avoid paying so much interest.


Action Item: Have you taken a cash advance in the recent past? Then try to calculate how much the loan has cost so far. If you haven’t taken a cash advance, at least look at your credit card statement to see how much you’ll pay if you do.


Critically short of cash? For a great rundown of the best ways to generate quick cash, see our post: “Help I Need Cash Fast.”


One Response to Great Savings 17: Never Borrow From An ATM

  • connie says:

    wow! What an eye opener! I have never used an ATM in my life, and have no intention of doing so in the future. Because of my unfamiliarity with the technology, I had no idea that you could even “borrow” money through the ATM! I thought they were only used to withdraw cash from your active accounts.

    I shall share this because I’m sure there are plenty of people out there who borrowed with their credit card via the ATM and have never given a thought to what a ripoff it is!


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