Fast Cash Loans: Advantages of Personal Loans
When you’re living paycheck to paycheck, even small financial hiccups can turn into catastrophes. The water heater breaks. You get a flat. Your child gets sick and needs blood tests that aren’t covered by insurance.
No matter what causes these money emergencies, they’re stress-inducing. They can be even more so if you don’t have quick access to cash. Today, we’ll look into some of the different ways you can handle these mishaps without getting raked over the coals.
What is a fast cash loan?
Fast cash loans are a way to get money into your pocket right now. This term covers an array of different lending products, like:
- Payday loans: Payday loans are high-interest, short-term loans. Interest rates can reach 300% APR or higher, according to the Consumer Financial Protection Bureau (CFPB), and you are typically required to pay the money back within two to four weeks.
- Title loans: Title loans are also high-interest, short-term loans, but to take out a title loan, you must agree to put up your vehicle as collateral. These loans usually last somewhere between 30 to 45 days. Some lenders may require smaller payments at first and a final, balloon payment, the CFPB says.
- Pawn shop loans: When you use a pawn shop, you’re taking in an item to trade for money. You will receive a fraction of what the shop thinks they can resell it for, and you have to pay the money back within a short time frame — typically somewhere between one and two months. The average loan is $150, according to the National Pawnbrokers Association, but these small loans can be costly. They may come with storage fees and excessive interest rates, depending on the state you’re in. Monthly interest rate caps go as high as 25%, which can add up to significant APRs if you renew the loan. If you fail to repay on time, you will lose the item you pawned.
The risks of fast cash loans
On top of the risk of losing your collateral at a pawn shop or through a title loan, short-term loans with high-interest rates are likely to get you into a nightmarish financial quagmire.
“Payday and car title lenders give you a matter of weeks to pay your loan off,” said Debbie Goldstein, executive vice president and head of federal policy at the Center for Responsible Lending. “That’s unrealistic. You end up having to take out another loan to pay the first one off, paying thousands of dollars to borrow a small amount of money.”
While these loans are expensive in the here and now, failing to pay them could affect your finances in the future, too. If you fail to repay your loan, the lender may report your missed payments to the credit bureaus. Negative items on your credit report could prevent you from taking out a car loan, qualifying for a mortgage or even getting an apartment. In some fields, a negative credit history can even make it difficult to get a job.
Because the negative financial cycle can be so hard to break, it’s best to look at all other alternatives before resorting to fast cash loans.
Getting and using a personal loan
If you can qualify for a personal loan, it’s a good alternative to fast cash loans. When you take out a personal loan, you receive a lump sum upfront, just like a payday loan. However, the interest rates on these loans are generally much lower, and borrowers have longer to repay them.
A good personal loan will require equal, fixed monthly payments, generally over the course of two to five years. There won’t be any surprise balloon payments at the end of your loan term.
Most personal loans won’t require you to put up any collateral. That means that if you fail to repay, your credit report will suffer, but the lender will not repossess your property.
Typically, personal loans fall in the range of $1,000-$35,000, though you can find some lenders who will lend in excess of that amount, and even some who will issue a personal loan for as little as $500.
To get a personal loan, you will need a good credit score. While some lenders will approve you with a score as low as 580, you’ll get the best interest rate offer if your score is above 740. You’ll also have to have a debt-to-income ratio that is on the lower side. To get your debt-to-income ratio, divide the amount of your minimum monthly payments by your monthly income. If you get 36% or lower, you’re likely to qualify for the best rates, according to Discover. If your ratio is higher, it doesn’t necessarily mean you won’t qualify; you just won’t qualify for the best rates.
If your credit isn’t where it needs to be, you’ll have a hard time getting a personal loan quickly. But you can take steps now to improve it. Paying your bills on time and paying down your debts are the two most effective ways to improve your score, according to myFICO.com. Doing so can also help you bring down your debt-to-income ratio.
Alongside your debt-to-income ratio, you have to prove that your income is high enough to reliably pay the loan back on time every month. You’ll need to provide your address, Social Security number and other identifying information as well.
While you can go into a bank or credit union to apply in person, you can shop online for a quick and easy way to compare terms and interest rates on personal loans.
Pros and cons of personal loans over fast cash loans
Personal loans are a better option than fast cash loans, but they have restrictions. Here’s a quick breakdown of the pros and cons of personal loans, in comparison with fast cash options.
- Payments and interest rates are predictable on fixed-rate personal loans.
- You have longer to pay the loan back, making repayment more realistic.
- Interest rates are lower than those of fast cash loans.
- No collateral is required on unsecured personal loans.
- You’re going to have a hard time finding a lender who will issue a personal loan for $500 or less. If you need to borrow small amounts, check out additional alternatives below.
- You may not qualify for a personal loan if you have bad credit, no credit or a lot of existing debt.
Other alternatives to fast cash loans
Personal loans are just one of several alternatives to fast cash loans. The option that is best for you depends on personal circumstances, including credit, ownership of property and community resources.
Home equity lines of credit
Home equity lines of credit, or HELOCs for short, are a line of credit your lender extends to you against the equity in your home. If you have equity in your home, this option allows you to only borrow as much as you need, and usually comes with a lower interest rate than you would get with a personal loan. It does, however, also come with closing costs and potential appraisal fees. Be sure to include these extra costs in your calculations as you compare your options.
It can take anywhere between a few weeks to a few months to get approved for a HELOC. This may be a viable source of funding if you already have one open, but otherwise you’re unlikely to get access to this form of credit “fast” enough to cover a bill due before payday.
It is important to be cautious with HELOCs. You need to be sure you can repay the money you borrow, because if you don’t, you could lose your house.
“That was one thing that happened during the financial crisis,” said Goldstein. “People convinced homeowners to take out more than one loan against their house, up to value of the house. When home values dropped, there was no way to sell your house to pay off the loan.”
Goldstein says that in times of crisis, you should see if the entity you owe money to will work with you on a payment plan. For example, medical and utility providers commonly allow consumers to pay their bills over a longer period of time with zero interest.
Say you recently had to visit the emergency room and your deductible was $500. You may be able to call the hospital and negotiate five payments of $100/month instead of one lump sum of $500.
Rounding up a few hundred dollars may be easier than it appears — helping you avoid borrowing all together. Go through your belongings and see if you can list any of them online or sell them to a local resale store. Think about different jobs you could perform around your neighborhood for extra cash, like walking dogs or doing handyman work.
Side hustles are a great way to get some extra cash, but not all of them are quick, and even those that are may be unrealistic for you to try. If you’re already working two jobs or taking care of a young child or elderly relative, time may be a commodity equally as precious as money.
Family and friends
Your family and/or friends may be able to help you with a no- or low-interest loan. Remember, though, that if you fail to repay, you may lose or damage that relationship. Just like you would with any other lender, you need to seriously think about how you’re going to pay back the loan before you take any money.
It is in both parties’ interests to set out the terms of the loan in writing. This can help keep you accountable and will prevent either of you from misremembering your agreement.
If you’re thinking you’d rather take out a payday loan than ask family or friends for money, consider this: 19% of payday loan borrowers needed help from family and friends to pay off their loan, according to 2013 research from the Pew Charitable Trusts. Almost all of those people could have borrowed from family and friends in the first place, the research showed.
Some employers will offer you an advance on your paycheck when an emergency happens. Goldstein explains that they don’t want to see their employees get in trouble with payday loans, and these advances solve the problem.
To learn more about your employer’s payroll advance policies, contact your human resources department.
Your religious organization
Many churches gather tithes or offerings not only to take care of the congregation’s spiritual leader but also to care for the congregation itself. Your religious organization may be able to provide you with a loan — or even gift money you don’t have to repay. Goldstein says that when this money is offered as a loan, it’s usually with low or no interest.
Today there are many apps to help you manage your money, and some of them specialize in helping you avoid fast cash loans. Apps like Earnin and Dave offer zero-interest loans which are repaid out of your next paycheck. Dave charges $1/month and gives the option to “tip,” while Earnin asks users to “pay what you think is fair.”
If you have the option to put an urgent expense on a credit card, doing so is likely much cheaper than a fast cash loan: The average APR on credit card accounts accruing interest was 14.99% at the end of 2017, according to the Federal Reserve.
How to borrow responsibly
If you have exhausted all other resources and still need a fast cash loan, be sure to use it responsibly. That starts with researching the lender before you borrow any money.
“Avoid storefront payday loan shops and online offers for fast cash and payday loans,” advised Goldstein. “Both are toxic options. They’ll have you take out loan after loan as long as they can get fees and interest out of you.”
Research from the Pew Charitable Trusts found that online payday loans are more expensive than storefront payday loans, with typical APRs of about 650%. The research also found that a third of online payday loan borrowers had loans that were set up to automatically withdraw only the loan fee on the borrower’s payday, rather than the total amount owed, therefore renewing the loan.
Instead, you should find a reputable lender. You can do so with personal loans for larger amounts of money at most financial institutions, but Goldstein recommends checking out credit unions and community banks — especially for smaller loans under $1,000.
But no matter from whow you borrow, she recommends searching for the lender on the CFPB’s complaint database. You can see consumers’ complaints about payday, title and personal loan companies, which can give you a sense of common issues borrowers run into. Goldstein also recommends checking your state attorney general’s website for any potential negative information about a lender. Search online reviews, as well — for personal loans, you can browse LendingTree’s collection of lender reviews.
Once you’ve borrowed money, whether it’s a personal loan or a fast cash loan, make it a top priority to pay on time. Late payments on personal loans can damage your credit score and result in fees that make your loan even more expensive. On the other hand, responsibly managing a personal loan can help you build good credit.
In the case of fast cash loans, you may find yourself needing to renew the loan if you can’t pay on time. That’s how these loans end up costing hundreds or thousands of dollars more than you initially borrowed. Payday loans aren’t generally reported to the major credit bureaus, according the CFPB, but if you fail to pay and they sell the loan to a debt collector, that may end up on a credit report.
The bottom line
Avoid fast cash loans if at all possible. Their sky-high interest rates and very short repayment time frames make it easy to get into a cycle of expensive debt, so you’re likely better off exploring other options, like negotiating payment plans, taking out a personal loan or tapping community resources.