Quick Loans May Be Tempting, But You’ll Save Money With Traditional Funding
When you are temporarily short on cash between paychecks, it is tempting to apply for quick loans online that do not require credit checks and offer easy approval processes. Having access to quick cash in less than 24 hours can help you avoid the consequences of an electricity shutoff, overdrawn checking account, expensive late fees or credit-damaging collections.
However, as a responsible consumer, you should also understand that quick loans are often saddled with much more aggressive charges and excessive interest rates than traditional funding sources, such as personal loans from banks and revolving credit lines.
The Temptations of Quick Loans
With quick loans, lenders grant short-term credit lines in small amounts that are easy to repay with your next paycheck. Since approval rules are lenient, even applications for quick loans with bad credit are instantly approved. This allows borrow to walk away with the cash they need as soon as they need it. In contrast, traditional lenders rarely grant approval of quick loans with bad credit and disbursements often take weeks to complete.
Applying for quick loans online is a good solution when unexpected emergencies arise or the amount needed is not worth the ding to your credit score for opening another account. You also avoid the hassle of having to gather all your financial records, submit a lengthy application and meet with the bank’s loan officer to sign packets of paperwork.
While there are several clear benefits to taking out quick loans, these types of cash advances are really only useful if you need to immediately satisfy an unexpected expense and you will definitely have the funds to pay the loan off with your next paycheck. The reason is because heavy fees and interest rates are attached to these quick loans. When you cannot afford to pay off the loan with your next check, the fees and interest charges skyrocket. In some cases, you can even end up paying more in fees than the original amount that you borrowed.
Quick Loans Carry Excessively Expensive Fees and Interest Rates
All quick loans are assessed a fee that is stacked on top of the total amount that you borrow. The fee varies but is usually determined as a percentage of the overall loan amount. Other lenders charge a flat fee, which is typically $15 for every $100 distributed. Under this model, if you agree to take out quick loans online totaling $400, then you are required to pay back $460.
While this might seem like a small sacrifice to access emergency funds, the Center for Responsible Lending (CRL) reports that this fee equates to an annual percentage rate of 391 percent. This is the rate you will pay only if you are able to satisfy the loan balance in two weeks with your next paycheck. If you come up short and need to renew the loan, then you are charged another $60 fee. Even when you put $100 from each check toward the loan, you will still need to roll it over four times. In the end, you will have been charged $320 in interest fees on a $400 advance.
That is total repayment of $720. The amount you pay could even be higher if the lender charges penalty fees or the payment that you authorized is denied by your bank for insufficient funds. In states that have not legally enacted caps, borrowers are often charged interest rates that soar past these astonishing numbers.
How You Save Money with Traditional Funding
Traditional lenders of conventional loans are more heavily regulated. They are more selective about who is able to borrow money, and they have strict structures for determining how much a person can afford to borrow and how often they can access funds. This often deters consumers with bad credit from even seeking out loans because they assume that the request will get denied.
However, borrowers who have an average to poor credit score are often able to secure loans with annual interest rates between 18 percent and 36 percent, reports Nerd Wallet. While 36 percent is still a difficult number to swallow, it is a far better deal than the triple-digit interest rates charged by most lenders offering quick loans online. In contrast to the scenario above, if you charge $400 on your 36 percent APR bank loan, then you will only pay $18 total in interest fees versus $320 as long as you still shell out $105 per check to pay off the balance within the same two months.
Tips to Secure Traditional Funding
If you are saddled with a bad credit score of less than 650 that disqualifies you from securing a loan even with a high interest rate, then you will need to dig a bit deeper to find a lender who is willing to give you a line of credit. Some lenders specialize in this market segment, including those who partner with the Personal Money Store to provide safe installment loans and personal loans.
In order to qualify for traditional funding with banks or credit cards that have larger limits, unsecured lines and reasonable fixed interest rates, you need a credit score above 700. A financial background check will consider the length of your credit history and how much debt you already owe other creditors. The lender will also evaluate your ability to pay back the loan, so steady income significantly improves your odds of getting approved for an affordable line of credit.
Borrowers with bad credit may need to bring on a co-signer to the account who has good credit. This person must be willing to have the amount count against their debt-to-income ratio and assume responsibility for the balance of the loan if it goes into default.
Another option is to secure the loan with an asset that is of equal value to the borrowed amount. Since this item is seized by the lender if you default on the loan, high-value items, such as homes and vehicles, should never be used as collateral. In addition to items like jewelry and boats, The Balance offers other suggestions for securing loans, including machinery, investments, insurance policies and collectibles. Before putting something that you love on the line, make sure that you are exchanging it for an equally valued loan.
The Best Funding Sources for Traditional Loans
The best conventional loans are typically available at banks that you already have accounts with, local credit unions and credit card companies. Look for an FDIC-approved or state-regulated lender. This designation means the lender is obligated to follow certain rules and you are covered by consumer protection laws. Carefully read the contract before you sign to prevent becoming a victim of predatory lending practices, such as paying high fees and a variable APR. The Personal Money Store can also connect you with reputable resources that provide traditional funding and quick loans with bad credit history ratings.