If you’re living paycheck to paycheck, a large unexpected expense can cripple you financially. And if you have bad credit, your options to get short-term cash are limited.
As a result, many online lenders promote what they call guaranteed personal loans. The problem? They’re just another kind of predatory payday loan.
What are guaranteed personal loans?
Guaranteed personal loans target people who need cash now — specifically, people with bad credit (defined as a FICO score of 579 or less) who can’t qualify for a personal loan or unsecured credit card.
For example, you might see an ad online for personal loans with no credit check. Other lenders will tout their instant personal loans or same-day personal loans.
These loans are appealing because many of them don’t require a credit check. But don’t confuse the ease of getting the loan with the ease of paying it back. According to the Consumer Federation of America, these loans typically charge a 400% APR or higher.
Also, you often have just weeks to repay the debt. If you’re already living paycheck to paycheck with no cushion, your situation could get even more dire before you know it.
How much do guaranteed personal loans cost?
Say you need $500 to repair your car so you can get to work. A guaranteed personal loan with a 14-day repayment period and a $75 finance charge would result in a 391% APR.
Here’s how to calculate that number:
Step 1: Divide the finance charge by the loan amount (75 / 500 = .15).
Step 2: Multiply that answer by the number of days in the year (.15 x 365 = 54.75).
Step 3: Divide that answer by the term of the loan (54.75 / 14 = 3.91)
Step 4: Move the decimal to the right two places, giving you an APR of 391%.
Based on their terms and predatory nature, guaranteed personal loans are essentially payday loans in disguise.
Consider these 5 alternatives to guaranteed personal loans
If you need cash fast but can’t qualify for a personal loan with a low interest rate, these options offer better terms.
1. Payday alternative loan
If you have short-term cash needs, guaranteed personal loans are an expensive solution. Instead, check with your local credit union to see if it offers a payday alternative loan (PAL).
Although PALs share some terms with guaranteed personal loans, the costs couldn’t be more different — the maximum APR on a PAL is 28.00%. Other terms include the following:
- You can get a loan between $200 and $1,000.
- Repayment terms range from one to six months.
- There’s a maximum application fee of $20.
- You must be a member of the credit union for at least one month to qualify.
- You can’t roll over one PAL into another.
The main drawback to PALs is the membership requirement. If you need cash now, you don’t have time to join a credit union and wait a month. If you’re already a member of a credit union that offers PALs, though, they offer a less expensive solution to your problem.
2. Personal loan from family or friends
Loved ones usually are willing to help you in a time of need if they think they can trust you to repay the loan. But borrowing money from family or friends can strain a relationship if payments don’t go smoothly.
If you consider yourself trustworthy, borrowing cash from a family member or friend can be a fast way to get cash and avoid expensive fees and interest. If you go this route, be respectful of their terms and responsible with repayment.
3. Credit card cash advance
If you have a credit card that allows cash advances, you can take your card to the ATM and make a withdrawal. Keep in mind, though, that your cash advance limit is often lower than your overall credit limit.
Credit cards typically charge a higher APR for cash advances than for regular purchases, and interest starts accruing immediately. Still, CreditCards.com pegs the average cash advance APR at 23.68%, which is much lower than the average APR for guaranteed personal loans.
4. Paycheck advance
Your employer might be willing to give you an advance on your paycheck if you’re dependable and in good standing. Note, however, that you still might have a financial shortfall before your next paycheck. Do the math with your expenses to make sure it’s worth it.
Plan out your upcoming expenses and consider any other income that might come in that could help cover the costs. Make sure you’ll still have enough cash to pay for necessities such as rent, utilities, and groceries.
5. Emergency assistance
For many people, the biggest problem with unexpected expenses is the fact that you now don’t have enough money to pay for groceries, rent, and other necessities.
Many local churches and community organizations have assistance programs to provide help to people in your situation. For example, the Low Income Home Energy Assistance Program (LIHEAP) provides assistance with some utility costs.
Most of these organizations are targeted to low-income households. For example, LIHEAP caps eligibility at no more than the greatest of 150 percent of the federal poverty guidelines (FPG) or 60 percent of your state’s median income. Also, your income can be no less than 110 percent of FPG.
To see what kinds of services are available in your area, do a quick internet search and reach out to your community leaders and neighborhood support groups.
Prevent the need for guaranteed personal loans with an emergency fund
Once you have enough cash to cover your emergency and other needs, work toward building an emergency fund to give yourself a safety net in the future.
If you don’t have much left over at the end of the month, start small. A few dollars here and there can make a big difference the next time your car or water heater breaks down.
As you prepare for future emergencies, your reliance on guaranteed personal loans, payday alternative loans, or other short-term loans will disappear.
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