We all face times when we need access to quick cash. Whether it be to pay off a bill or deal with an emergency, having access to cash can be vital to making it through the situation. One of the more popular cash access options for some has been guaranteed personal loans. Guaranteed personal loans provide quick access to cash but often come at a steep cost. Consider the following before taking out one of these loans.
What Exactly Are Guaranteed Personal Loans?
If you've never heard of guaranteed personal loans, that's because they typically go by their more commonly known term – payday loans. Payday loans are considered guaranteed because they're secured by your paycheck. When you take out an unsecured personal loan, for example, it's not secured by anything. The lender takes you at your word you'll pay the loan back. Payday loans, on the other hand, are secured much like a car loan or mortgage on your house.
Here's how payday loans typically work. They loan you the money, you write the lender a post-dated check and they cash it on the given date, which is typically two weeks later. In some instances, they might even require electronic access to your account to pull out funds. This may seem harmless and a justifiable way to take care of a problematic situation – it's not.
Why You Should Avoid Guaranteed Personal Loans
Payday loans pose one major problem – they create a cycle of debt. "The average payday loan borrower is in debt for five months of the year," says the Pew Charitable Trust, pointing out the unending cycle many face when they take out a payday loan. Why is that the case?
When you don't have the funds to repay the loan at the end of the typical two-week term, you roll the loan into another loan and a new set of fees get added to the loan. You may also find that some lenders will even attempt to cash your check before the given date or before your paycheck being deposited, creating the risk of overdraft fees at your bank, thus adding to the financial pain.
Other reasons why you may want to avoid guaranteed personal loans include:
- Interest rates on payday loans can be as high as 400 percent, or higher.
- Payday lenders make over $9 billion in fees each year as they typically charge the highest rate they're allowed by local law.
- Many who take out payday loans, three-quarters to be exact, take out at least 11 loans each year – according to the aforementioned Pew Charitable Trust.
- You often only need a checking account to get a payday loan, making them too easy to take out.
Payday loans may seem like a great way to bridge your budgetary gap. Unfortunately, they're far too expensive and largely lead to a cycle of debt.
Alternatives to Consider
If a payday loan isn't a good option to consider when you need access to funds, what alternatives should you look at? Here are some other popular, often far cheaper, options to keep in mind:
- Unsecured personal loans – personal loans will take several more days to receive versus a payday loan, but they're far cheaper and have longer loan terms. You can get a personal loan through a local bank, or you can get a personal loan online.
- Cash advance from a credit card – Cash advances aren't a popular suggestion in many circles. However, if this is a one-time need and you're committed to not doing it again, you can save considerable money even with rates being as high as 30 percent.
- Borrow money from a family member – mixing family and money can be tricky, but like the cash advance above, is far more desirable than taking out a payday loan. Just make sure to set clear terms, so your family member has the confidence you'll pay them back.
With the average payday loan recipient taking out funds to cover monthly bills there may be many other alternatives to consider from selling something to picking up extra hours at work.
Most any alternative will be better than getting caught in the cycle of taking out a payday loan, especially if you've turned the corner on managing your finances. Additionally, if you have outstanding debt, you may also want to look at consolidating or refinancing it to lower your interest rates to help you save money each month.
Guaranteed personal loans seem like an ocean in the middle of a desert. They're simply a mirage. Find an alternative that works for you and save yourself the headache of a payday loan.