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Beware Guaranteed Loans: Here’s Why, Plus Better Options

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A major car repair, loss of employment or other unforeseen events can leave you in a financially tight spot. If you don’t have an emergency fund or savings, you may need to find quick cash to help you deal with a financial challenge.

Guaranteed loans have been the answer for many people with fair or low credit who had expenses that they weren’t prepared to cover. But because these loans sometimes offer predatory terms, it’s important to evaluate the terms and conditions carefully, so you understand how this type of borrowing will affect your finances.

Guaranteed loans can come with predatory terms

Payday loans

A payday loan is a short-term loan offered to consumers by online and storefront lenders. The loan is an advance on a person’s paycheck, so once the borrower has received the loan funds, it is to be repaid in a single payment by their next payday. This type of loan is usually no more than $500, but the limit varies by state, and in some places, they aren’t even legal.

To qualify for a payday loan, borrowers need to have a checking account where the funds will be withdrawn from when the loan payment is due. Payday loans have astronomically high interest rates, and they need to be repaid quickly. Extending or renewing a payday loan is an expensive option, but you want to avoid being caught in a cycle of continually paying to extend or renew the loan — and never actually repaying it in full.

APR Borrowing limits Term lengtds How to qualify
Nearly 400% Varies based on state; typically $500 or less. Varies based on borrower’s payday; 14 days to 6 months. Borrowers must have a checking account.

Title loans

A title loan is a personal loan that is secured using the borrower’s car title. They are available through online and storefront lenders and are generally to be repaid within 15 or 30 days of the borrower receiving the loan funds. Similar to other types of guaranteed loans with predatory terms, title loans often have an extremely high APR, at least 300% and various fees attached to them.
This type of loan may seem ideal when you need emergency funds, but it is risky because if it is not repaid, the lender can repossess your car. If you are unable to repay the loan by the due date, the option to extend or roll over the loan may be an option. However, this drives up the total cost of the loan because there are additional fees and interest, so if it’s possible, borrowers should work to ensure they can repay the loan by the due date.

APR Borrowing limits Term lengtds How to qualify
300% Varies based on lender; average loan between $100 and $5,500 15 or 30 days Borrowers must have a valid driver’s license and a vehicle with a title and auto insurance

Short-term installment loans likely not a better option

Short-term installment loans are loans that are repaid little by little over time instead of in one lump sum. This type of loan has characteristics of both personal loans and guaranteed loans. Short-term installment loans still have high interest rates, but what makes them different from other guaranteed loans is that the repayment terms are longer.

Although a longer repayment period may make this option more appealing, the high interest rate can still make an installment loan an expensive option, especially since the longer you take to repay the loan, the more interest you are paying. Many states have capped the APR that can be charged for this type of loan, but you may still see rates as high as 305%.

Safer options for fast funding (but without guaranteed approval)

Personal loans

Personal loans are unsecured loans that can be used to cover the cost of any expected or unexpected expense. Depending on the lender, you will see varying borrowing limits, interest rates, minimum credit score requirements, fees and more. Since the loan doesn’t require collateral, lenders favor borrowers with good credit. However, some lenders offer personal loans to borrowers with fair or bad credit.

When compared to the alternatives, you can save money with a personal loan option, depending on your credit score, loan amount, loan term and interest rate. This makes it easier to fit a personal loan repayment into your budget. And unlike guaranteed loans, personal loan terms span months and years rather than weeks, which may make payments more manageable.

Don’t qualify? Try finding a cosigner: Applicants with less-than-perfect credit should consider applying with a credit-worthy cosigner if they do not qualify for a loan on their own. If this person has an acceptable credit score, it can be easier to get approved. The cosigner is taking on a risk because if the primary borrower defaults, the cosigner will be responsible for repaying the loan.

Credit card

Depending on how much money you need and when you need it, a credit card could help solve your problem. A credit card is an unsecured revolving line of credit that allows cardholders to make purchases and repay all or a portion of the balance by the monthly due date. When the balance due is paid, credit once again becomes available to the cardholder for them to use to cover the cost of various expenses.

There are varying credit requirements for credit cards, but since it is unsecured, a high credit score will increase your odds of approval and your chances of getting a lower interest rate. Even if a cardholder with less-than-perfect credit has a high interest rate, when you compare it to the cost of guaranteed loans, a credit card may be more affordable. Additionally, you can avoid paying interest if you pay your card balance in full by the due date.

Secured credit card

Secured credit cards are a viable option for consumers with fair or low credit who may need to cover a smaller expense, like a phone bill. Although secured credit cards work similarly to traditional or unsecured credit cards, there are a few key differences to note before moving forward with this option.

With secured credit cards, approval isn’t largely based on credit score because cardholders gain access to a line of credit by putting down a deposit. Most secured credit card issuers report payment activity to the credit bureaus, Equifax, Experian and TransUnion. On-time payments help you build credit, so if you choose this option, verify with your card issuer that this will be recorded on your credit history.

Loan from a family member or friend

A family member or friend may be able to lend you the money you need to help you out during financial hardship. This is usually a cheaper option because you will not be paying interest or fees, which you would pay with guaranteed loans or other funding options. Although this person is not a lender, it would be wise to set up a loan repayment agreement so both parties understand the terms, including the amount to be repaid and when it is to be repaid.


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