An instant loan can seem like an easy option when you urgently need money and do not have strong credit. Within a day or two of approval for an instant loan – sometimes the same day – you can quickly receive cash to cover unforeseen costs like a car repair or a medical bill. However, instant loans are extremely expensive and can put your finances at risk just as quickly.
What is an instant loan?
An instant loan is a short term loan that is usually for a small amount of money and comes with high interest rates and fees. There are a few types of instant loans, and some have multiple names. Types of instant loans include:
- Payday loans. Also called a cash advance, a payday loan does not require collateral and gives you money on the same day. You have to pay off the loan – plus high interest charges – before your next pay period.
- Loans from pawn shops. A pawnshop, or pawnshop, is a secured loan. The pawnshop holds an item that you own as security for the loan. In exchange for the item, you receive a loan for an amount less than the value of the collateral. If you do not repay the loan by the payment date, the pawnshop will claim ownership of the item.
- Car title loan. Also called a pink loan, this loan is guaranteed by the title of your vehicle. You can still drive your car, but you will need to repay the loan in full, including interest charges, by the due date. If you don’t pay it back on time, you risk losing your car.
No matter what type of instant loan you are considering or what a lender calls it, an instant loan is a high risk borrowing option.
How do instant loans work?
Payday loans are a common instant loan option, with 12 million adults in the United States using them each year, according to the Pew Charitable Trusts. Instant loan amounts are generally around $ 500 or less. Interest on loans is incredibly high, sometimes expressed as a percentage or in dollars for every $ 100 borrowed. For example, a 15% fee for every $ 100. Fees vary from state to state and each state has its own fee limits.
If you are considering this borrowing option, here is how a payday loan works:
- Submit an instant loan application. Payday loans generally do not require a credit check. However, you will need to provide your personal information, be at least 18 years old with valid ID, show proof of income (for example, a pay stub), and have a bank account. You can find a lender online or in person at a local cash advance location, depending on where you live.
- Give a post-dated check or ACH authorization. You will need to write the lender a post-dated check with the loan due date. The amount of the check will include the amount borrowed plus interest. If you go through the instant online lending process, a lender may require an Automated Clearing House (ACH) authorization for your bank account.
- Receive your loan funds. The lender will provide the loan amount (excluding fees) in the form of a lump sum in cash. For an instant loan online, it can be deposited directly into your account if you have given them access.
- Pay off the loan on the due date. The repayment term for a payday loan is approximately two weeks, or when you receive your next paycheck. It also varies by lender, depending on the details of the loan agreement. When it comes time to repay the loan, you will pay the loan amount and fees and get your post-dated check back.
If you cannot repay the loan on time, some payday lenders offer a rollover to delay repayment for another pay period. Not all states allow rollovers, and this option costs an additional fee.
Are instant loans a good idea?
In most situations, instant loans are not a good idea and should be avoided if possible. According to the Federal Reserve of St. Louis, the average interest rate on payday loans is 391% for the first two weeks. It’s easy not to realize how much you’re paying in fees.
For example, paying an extra $ 60 later seems doable if it means getting $ 400 today. And don’t think that the rollover feature offered by some lenders is a lifeline, either.
In the same example, a deferral for another two-week payment extension might cost $ 60 on top of the $ 460 in principal and fees you already owe. Now you will have paid $ 120 to borrow $ 400 over four weeks.
According to the Consumer Financial Protection Bureau, more than 80% of borrowers renew their payday loans or get another loan within 14 days. If your budget was tight initially, it might be difficult to pay off the loan and attempting to initiate multiple renewals until the fees skyrocket.
If your loan is in default, debt collectors can report it to the credit bureaus and your credit will suffer. Debt collectors can also sue you to collect unpaid funds. If the court rules in their favor, your wages could be garnished.
Alternatives to instant loans
Before going ahead with an instant loan, determine if you have used all the alternatives. Here are some ideas to explore first:
- Negotiate a payment plan. Contact your creditor or agent to explain your financial situation and see if they offer discounted payment plans.
- Personal loan for bad credit. While this option also comes with high interest rates, they are still considerably lower than the payday loan fee. In addition, most personal loans offer longer repayment periods.
- Family and close friends. Ask trusted family members and close friends if they’re ready to give you a short-term loan. Make sure the two of you are clear about interest and repayment expectations.
- Talk to a nonprofit credit counselor. For a long-term solution, discuss your debt options with a nonprofit credit counseling like the National Foundation for Credit Counseling. They can help you with a debt management plan so you can be prepared for unforeseen expenses.
Instant loans are not an ideal solution when a big expense surprises you. If you can, consider alternatives before paying unnecessary fees with a payday loan.
If you think an instant loan is really your only recourse, read your state’s payday loan regulations. States impose maximum loan amounts, fee and rollover restrictions and other requirements on payday lenders to discourage predatory lending practices.