What is a Guaranteed Loan?
To receive a traditional personal loan, you’ll have to submit a formal application and the lender will then check your credit and decide whether to approve the loan. But if you have poor credit — or don’t have much of a credit history at all — you might be denied.
Guaranteed loans, on the other hand, don’t involve a credit check and are “guaranteed” to be approved (even if there are some exceptions). These loans are more accessible but cost much more, due to high interest rates and fees. Predatory payday loans are a common type of guaranteed loan.
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Types of guaranteed loans
If you have a financial emergency and need fast cash, a guaranteed personal loan might seem appealing: You get the money you need quickly and don’t have to go through a formal loan application process. Some people might feel like it’s the only available option.
Unfortunately, guaranteed loans can set you back even further, trapping you deeper in debt. Loans with guaranteed approval are typically smaller and have sky-high interest rates, shorter repayment terms and expensive fees. Too often, borrowers are unable to pay back the initial loan and have to take a second loan to repay the first. The following types of guaranteed loans should be avoided when possible.
Payday loans are costly, short-term loans; in theory, you’ll use funds from your next paycheck to pay off the loan. But, due to high fees and rapidly accumulating interest, many borrowers roll over their loans and keep borrowing as their balance grows. In many cases, the annual percentage rate (APR) can be around 400% or more — so you could easily wind up paying back several times the amount you initially borrowed.
Some states limit how much you can borrow with a payday loan, and others don’t allow them at all. A payday lender will ask for a post-dated check or authorization to take the funds directly from a deposit account when the loan payment is due. Those payments are usually due on your payday or when you receive fixed-income payments, like Social Security.
Unlike payday loans and unsecured personal loans, auto title loans are secured. You offer your car title as collateral, and the lender can repossess your car if you don’t pay off your loan on time. Not only are title loans short-term with high interest rates, but you also risk losing your vehicle.
Car title loans are paid out as a percentage of the vehicle’s value, and they’re expensive — around 300% APR in many cases. Like payday lenders, car title lenders also can roll over the debt into new loans and cause your debt to snowball. Some lenders offer both types of loans. Certain states restrict title loans or ban them entirely.
Closed-end installment loans share some characteristics with payday and title loans but are typically larger and have longer terms. Installment loans are heavily regulated, with most states capping the APR lenders are allowed to charge. Still, the APR on installment loans can be very high — maximums may be around 400% or 500%.
Installment loans come with fixed monthly payments that have fees and interest included. If you don’t repay your loan on time and in full, your debt could be sent to collections, which negatively impacts your credit score.
Risks of guaranteed loans
Guaranteed loans can sink you further into debt by charging high interest and fees that make the loan very difficult to repay. Every year, 12 million borrowers use payday loans to meet short-term financial needs. Often, though, they end up rolling that debt into a second loan when they’re unable to repay the first, and the fees can add up quickly.
Suppose you borrow a $500 payday loan that comes with $100 in fees and a two-week term. If you can’t repay the $600 balance on your next payday, you would get hit with another $100 fee when the loan rolls over (in addition to potential extra fees). At that rate, you’d owe $1,100 or more within three months — more than double the amount you initially borrowed.
How to get a guaranteed personal loan
Getting a guaranteed personal loan should be fairly straightforward: Contact a lender, give them some of your personal information, meet any other requirements and receive your funds. If you’re getting a payday loan, you may need to provide your bank account details. You may need to hand over your car title to receive a title loan. Lenders make it easy to get a guaranteed loan — but just because it’s easy doesn’t mean it’s a sound financial decision.
Alternatives to guaranteed personal loans
Fortunately, there are reputable alternatives for consumers who are considering a guaranteed loan. These options may not necessarily be available to everyone, but they have much more favorable terms than guaranteed loans and may help you access the cash you need.
Payday alternative loans
A payday alternative loan (PAL) is a small, short-term loan with an APR capped at 28% — much lower than payday loans. They’re only available through credit unions, and you must be a member for at least a month to qualify for many PAL products.
You won’t necessarily have to take a credit check, so this could be an alternative for borrowers with bad credit or no credit history. There are also limits on how long a PAL loan term can be (the maximum term is one year), but these loans generally offer much longer loan terms than guaranteed loans.
Unsecured loan with cosigner
If you don’t qualify for a bad credit personal loan, you might be able to secure financing by using a cosigner who agrees to take on the liability if you can’t repay the loan. Unsecured loans don’t require collateral and typically have lower interest rates, longer terms and higher minimum loan amounts than most guaranteed loans. Getting a personal loan with a cosigner may make those loans more accessible.
Secured personal loan
Secured personal loans might be an option if you can’t get approved for an unsecured loan, depending on the collateral you can put up. Your house, car or bank account can all be used as collateral, but you could lose them if you don’t repay the loan. Lenders generally consider secured loans to be less risky, so you might be able to find a lower interest rate than you’d get for an unsecured loan.
0% APR credit card
While many credit cards have high APRs, some offer 0% APR introductory periods, meaning you won’t be charged interest during the promotional period. Watch out, though: There are cards out there that come with deferred interest (typically store cards). If you have a card with deferred interest and you don’t repay the full balance before the end of the intro period, you could be hit with all the interest that would have been accumulating since the date of purchase.
As long as you use the card responsibly and understand the card’s terms, it could be a good way to borrow money without paying interest. However, you’re likely to need a higher credit score to qualify.