What is an instant loan?
An instant loan can make you money fast— sometimes on the same day — even if you don’t have strong credit. Getting quick cash for unexpected expenses like a car repair or a medical bill might seem like a solution. However, instant loans put you on a slippery repayment slope that you may not be able to afford financially.
The harmful effects of instant loans are even more detrimental for low income borrowers. According to the California Department of Financial Protection & Innovation, almost half (49%) of payday loan borrowers had an income of $30,000 or less in 2020. Twenty percent of payday loan borrowers earned $30,000 or less.
Instant loan products, which typically charge exorbitant interest rates and fees, strain the finances of borrowers who are already struggling to stay afloat. If you’re considering an instant loan, think about what it will mean for you financially and weigh each option before signing the terms.
What is an instant loan?
An instant loan is a short-term loan usually for a small amount of money with high interest rates and fees. Instant loans come in a few varieties:
- Payday loans. Also called cash advance, a payday loan does not require collateral and offers you money the same day. You must repay the loan, plus high interest charges, by your next pay period.
- Pawnbrokers. A pawnbroker, or pledge loan, is a secured loan. The pawnbroker holds an object that you own as collateral for the loan. In exchange for the article, you receive a loan for an amount less than the value of the collateral. If you do not return to repay the loan by the payment date, the pawnbroker will claim ownership of the item.
- Car title loan. Also known as a pink slip loan, this loan is secured by the title of your vehicle. You can still drive your car, but you’ll have to repay the loan in full, including interest charges, by the due date. If you don’t pay it back on time, the lender can take possession of 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 every year. Instant loan amounts are usually around $500 or less. Interest on loans is incredibly high, sometimes quoted as a percentage or dollar amount for every $100 borrowed. For example, a 15% fee for every $100. Fees vary by state and each state has its own fee limits.
If you are considering this borrowing option, you will need to:
- 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 a valid ID, present proof of income (e.g. payslip) and have a bank account. You can find a lender online or in person at a local cash advance office, depending on where you live.
- Give a post-dated check or ACH authorization. You will need to write the lender a post-dated check bearing the due date of the loan. The amount of the check will include the amount borrowed, plus interest. If you follow the Instant Loan process online, a lender may require ACH (Automated Clearing House) authorization for your bank account.
- Receive your loan funds. The lender will provide the loan amount (excluding fees) as a cash lump sum. For an instant loan online, this can be directly deposited into your account if you have given them access.
- Repay 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’s time to repay the loan, you’ll pay the loan amount and fees and you’ll get your post-dated check back.
If you can’t 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 St. Louis Federal Reserve, the average payday loan interest rate 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 lifesaver either. In the same example, a rollover for another two-week payment extension may 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, four out of five payday loan borrowers renew or renew their loan within 14 days. If your budget was tight to begin with, it might be difficult to repay the loan and tempting to initiate multiple rollovers until fees increase.
If your loan is in default, debt collectors can report it to the credit bureaus and your credit will suffer. Collection agents can also sue you to recover overdue funds. If the court rules in their favor, your wages could be garnished.
What are the alternatives to instant loans?
Before going ahead with an instant loan, ask yourself if you have gone through all the alternatives below.
- Negotiate a payment plan. Contact your creditor or repairer to explain your financial situation and see if they offer reduced payment plans.
- Personal loan for bad credit. Although this option also comes with high interest rates, they are still considerably lower than payday loan fees. According to debt.org, payday loans basically have interest rates of 300-500% when you factor in fees, while a personal loan for someone with bad credit can have an APR of 25-30%. , at most. Moreover, most personal loans offer longer repayment periods.
- Family and close friends. Ask family members and close friends you trust if they are willing to give you a short-term loan. Make sure you’re both clear about interest and repayment expectations. Enter into a written agreement, if necessary.
- Talk to a nonprofit credit counselor. For a long-term solution, discuss your debt options with a nonprofit credit counseling agency, such as the National Foundation for Credit Counseling. Their services are free or inexpensive, and they can help you with a debt management plan so you can be prepared for unexpected expenses.
The best way to avoid using payday loans is to adopt good financial habits. Make sure you have a budget in place that works for your income and expenses. Save in advance for big expenses you know, and try to set up an emergency fund which you can use for large unforeseen expenses. It’s a good idea to save an emergency fund that will cover your usual expenses for three months.
Instant loans are not an ideal solution when a big expense surprises you. If you can, consider the alternatives before incurring unnecessary costs through 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, restrictions on fees and rollovers, and other requirements on payday lenders to discourage predatory lending practices.
To learn more about the rules in your state, you can contact your banking regulator or attorney general.