We’ve all been there. You’re driving home from work when you hear a loud pop — you have a flat tire. Or, your child falls off the swing set and needs stitches. Perhaps the dog ate something he shouldn’t have and now needs to go to the vet.
These unexpected emergencies happen all the time, leaving many people in a bind. When you consider that the Federal Reserve Board found that nearly half of all Americans don’t have $400 saved for an emergency, it’s easy to see how unexpected costs can become a real crisis.
Without savings or good credit, some families turn to quick and easy personal loans, such as payday loans, title loans, or other short-term debt. Although these loans can get you the money you need fast, they can have serious consequences.
How personal loans work
A personal loan is a broad term used to describe many different kinds of debt. In general, it’s a loan you take out to cover personal expenses, such as medical bills or a car repair.
For a traditional personal loan, you would go to a bank or financial institution and submit an application for a loan. The lender reviews your credit history and income to determine whether you’re a good candidate. The process can take anywhere from a few days to a few weeks to review your application and to disburse your funds.
Loans based on your credit history and income can have repayment terms as long as seven years, and you can borrow as much as $100,000. Depending on your credit, you could qualify for a personal loan with an interest rate as low as 5.25%, making it a low-interest way to consolidate your debt or handle an unexpected expense.
However, you might be ineligible for a traditional personal loan if you have poor credit or low income. If that’s the case, you might be tempted to turn to a rapid-approval, short-term personal loan, instead. Some common options include:
- Payday loans: With a payday loan, you borrow a relatively small amount of money to cover an emergency or hold you over until payday. Your loan is due when you receive your next paycheck.
- Car title loans: If you take out a car title loan, you give the lender the title to your vehicle in return for a small loan. Most vehicle title loans have repayment terms that are 30 days or less.
- Short-term loans: Short-term personal loans are available online. You can borrow small amounts quickly, but they often have high interest rates.
For all three types, the benefit is speed. You might go to a loan distribution center in person, use your car title to borrow $500 on the spot, or complete an application online and get your money in as little as 24 hours.
Easy personal loans make borrowing so simple and quick, you can end up in debt without fully realizing what you’re doing.
The problem with quick and easy personal loans
Applying for a loan and getting the money quickly might sound like a great solution. However, they’re often not a smart option. Here are five reasons why you should avoid these types of personal loans.
1. You’ll pay much more in interest than you borrowed
Payday and rapid-approval lenders can give out loans without credit checks for one reason: They charge astronomical interest rates. According to a report by the Consumer Financial Protection Bureau (CFPB), this type of debt can have interest rates as high as 400.00%.
You might not realize just how big that number is until you start making huge payments on your debt.
For example, if you took out a $1,000 traditional loan at 5.00% interest with a 12-month repayment term, you’d pay back just $1,027.29 in total. However, if you borrowed $1,000 from a no-credit-check lender and had an interest rate of 400.00%, you’d pay back a staggering $4,130.85 over 12 months.
Your relatively small loan could quadruple, costing you thousands more than you originally borrowed.
2. It’s hard to break the loan cycle
Once you’ve taken out a short-term personal loan, vehicle title loan, or payday loan, it’s hard to stop the debt cycle. According to the CFPB, more than four out of five car title loans are renewed the day they’re due because the borrower can’t afford to pay it off.
Thanks to high interest rates, it’s understandable why you can’t get ahead. You’ll likely need to turn to your lender again and again to keep up with your payments and make ends meet.
If you borrow a $500 payday loan, you might have to pay back $1,000 in two weeks. When the due date comes and you can’t afford to pay $1,000, the lender might offer to roll over the loan into a new one. Now, your loan is for $1,000, instead of $500. This cycle can continue on, causing your debt to spiral out of control.
3. You might lose your collateral
Depending on what kind of loan you apply for and your credit history, you might have to put up collateral to qualify for a loan.
Collateral is something of value you use to guarantee the loan. If you can’t afford your payments, the lender keeps the collateral. In the case of vehicle title loans, the collateral is your car. Fall behind, and the lender can seize your vehicle.
With higher interest rates and short repayment terms, your chances of losing your collateral are high. In fact, 20 percent of borrowers who take out an auto title loan end up losing their vehicles to their lender, reported the CFPB. On top of the money you lose, you’re left without transportation to work, making it even harder to make an income.
4. Many lenders require access to your bank accounts
When you take out a quick personal loan, most lenders will require you to provide your checking account and routing numbers. Although many banks and lenders offer automatic payments as a convenience to their customers, it’s usually optional. With short-term loan lenders, you don’t have a choice.
Because they have access to your bank account, many of these lenders will automatically withdraw the amount you owe on the due date. It doesn’t matter if your paycheck is late or you have to pay rent; the lender ensures they get paid.
Aside from losing money you might have needed for your bills, you also run the risk of overdraft fees and penalties.
5. The repayment term is much shorter than with other kinds of debt
Traditional personal loans can have repayment terms that are three to seven years long. However, most loans that don’t require a credit check have short repayment terms.
With payday loans, for example, you could have just a few weeks to repay the loan with interest. The high interest rates cause the balance to balloon, making it harder to repay.
Think about it: If you took out a payday loan because you couldn’t afford $500 for a car repair, what are the chances you can afford to pay $650 or more when the loan is due in two weeks? Pretty slim. To prevent falling behind, you’ll need to take out another loan. Before you know it, you’re thousands in debt over a minor expense.
Avoiding short-term loans
When you’re short on cash, payday loans and quick and easy personal loans can be appealing. However, borrowing from these lenders can cause you financial headaches for years to come.
If you’re facing an emergency and want to avoid the payday loan cycle, here are alternatives you can use to get the money you need.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||Rates (APR)||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|7.73% - 29.99%||$1,000 - $50,000|
|5.37% - 14.24%1||$5,000 - $100,000|
|8.00% - 25.00%||$5,000 - $35,000|
|4.99% - 16.24%2||$5,000 - $50,000||Visit Citizens|
|5.99% - 35.89%||$1,000 - $40,000||Visit LendingClub|
|5.25% - 14.24%||$2,000 - $50,000||Visit Earnest|