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Understanding the fundamental principles behind a cash advance can save new borrowers a lot of stress and make the borrowing process easier. This article will explore some of those cash advance fundamentals.

A consumer cash advance is simply when a financial institution lends you cash with the promise (from you) that you will repay the cash. Most cash advance payments include both principal and interest.

Principle is the amount of cash that you borrowed. Interest is the price paid for borrowing cash; this is usually expressed as a percentage.

In an interest-only cash advance, the interest of the cash advance is paid off before the principal. It is important to understand this because many mortgages are interest-only cash advances. Using this kind of cash advance allows the lender to make a faster profit on the cash advance, and in return it also allows the lender to offer you lower interest rates.

Borrowers should understand that during the first years of an interest-only mortgage the entire monthly payment goes toward interest. Because of this there will be no decrease in the amount of the principle that was borrowed. In some cases, the initial interest-only payments are lower than the principal payments. This allows the borrower, who expects to earn more profit over time, to obtain a larger cash advance.

Variable Rates versus Fixed-Interest Rates

Aside from interest only cash advances, you may see offers for cash advances that are based on either variable rates or fixed rates. Credit cards generally use either the variable or fixed rates systems when calculating the interest.

Variable rate cash advances are based on the prime lending rate, and then some additional interest percentage is added in order to cover profits for the lender. Whenever the Federal Reserve raises interest rates, your bank will raise your interest as well. If the prime lending rate is low, variable rate cash advances and credit cards can be especially competitive with fixed rate cash advances.

Fixed rate cash advances and credit cards offer you guaranteed interest rates that do not fluctuate. You will know what your payments are each and every month based on the fixed rate percentage of the cash advance that you took out. This offers consumers more emotional security because they do not have to worry about their monthly bill increasing suddenly.

All borrowers should understand that variable rates are different than teaser rates. Teaser rates are temporary and last only for a limited time, usually three to six months. Once that period of time is over, the rate will go up and so will your monthly bill.

One of the essential principles behind a cash advance is establishing a good credit history. The fastest way to get a poor credit rating is to not pay your monthly bill or to be habitually late in paying your bill. These activities are usually reported to the three big credit reporting agencies and this data will stay on your credit history record for years to come. If you must take a cash advance out make sure that you can make the monthly payments on time.

If you have any questions about your cash advance or the interest that is being charged ask the credit person to explain it to you in detail. They are happy to do this. As a general rule, try to keep your non-mortgage debt payments below 10-15% of your monthly take home pay.