What is an instant loan?

An instant loan may seem like an easy option when you need cash urgently and don’t have strong credit. Within a day or two of getting approved for an instant loan – sometimes the same day – you can quickly receive cash to cover unexpected expenses such as a car repair or medical bill . However, instant loans are extremely expensive and can put your finances at risk just as quickly.

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. There are several types of instant loans, and some go by several names. Types of instant loans include:

  • Payday loans. Also called a cash advance, a payday loan doesn’t require collateral and gives you cash 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, you risk losing 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 each year, according to the Pew Charitable Trusts. 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’re considering this borrowing option, here’s how a payday loan works:

  1. 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.
  2. 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.
  3. 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.
  4. 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, more than 80% of borrowers renew their payday loan or get another 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.

Alternatives to instant loans

Before going ahead with an instant loan, ask yourself if you have gone through all the alternatives. Here are some ideas to explore first:

  • 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. 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.
  • 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. They can help you with a debt management plan so you can be prepared for unexpected expenses.

Next steps

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 find out more about the rules in your state, you can contact your state banking regulator Where Attorney General.

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