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A guaranteed personal loan may sound like a lifesaver if your credit is rocky and you’re in a financial pinch. But these loans aren’t as friendly as they may seem.
You’ve probably seen guaranteed personal loans hyped as a source of quick cash with an easy loan application process and no credit check. But while the name implies guaranteed approval, that’s not exactly how it works. At the very least, most lenders need to check that you have an income source before handing over money.
Here’s a look at how guaranteed personal loans work and some alternatives worth exploring.
What’s a guaranteed personal loan?
It’s common to see lenders refer to payday loans and other short-term loans as “guaranteed” personal loans. Guaranteed personal loans typically target people with low income or rough credit who think they don’t have many other options. This type of loan may be considered predatory: It benefits the lender — with high fees and interest rates — at the expense of the borrower.
When you get a payday loan, you use a postdated check or authorization to debit funds from your bank account, credit union or prepaid card account as collateral. The loan is usually due on the day you receive your next paycheck, and loan amounts are usually small, about $100 to $1,000. Lenders charge fees that can equate to triple-digit APRs.
Short loan terms of one or two weeks and APRs that can climb to 400% or more make it hard to pay back the full amount. As a result, you may have to roll over unpaid balances into new loans. If your finances are already tight, a payday loan could send you into a cycle of debt.
Other common types of guaranteed personal loans include short-term installment loans. These smaller loans tend to have longer repayment periods of a few months to a few years, but still have high APRs.
The price tag of a guaranteed personal loan
Payday-style loans typically charge a fee of $10 to $30 per $100 borrowed. If you need $300 to pay for a car repair, and the lender charges $15 for every $100 you borrow, you’re paying an APR of nearly 400%. At this point, your total cost comes to $345. According to the Consumer Financial Protection Bureau, nearly one in four initial payday loans is rolled over nine times or more. If you end up having to roll over a payday loan nine times, fees alone could reach $400 or more.
What to watch out for
When shopping for a loan, watch for these red flags.
- High interest rates: A loan should come with terms that make it realistic for you to pay it back. Calculate your monthly payment schedule while you consider your loan terms. Before signing on to a loan, ask yourself if you can afford to pay it back on time.
- Shady lenders: Walk away from lenders who aggressively and constantly market to you, won’t answer your questions, or pressure you into signing a loan agreement or borrowing more than you can pay back. Before approaching lenders about loan options, look up potential lenders in the Consumer Financial Protection Bureau’s Consumer Complaint Database.
- High or hidden fees: By nature, hidden fees are hard to spot. That’s why it’s important to read the fine print so you know what kind of fees you might have to pay and whether the cost is manageable. Aside from interest costs, some common legitimate fees include origination fees (typically 1% to 8% of the loan) and prepayment penalties.
- No credit check: Legitimate lenders base credit decisions on your ability to repay a loan. Typically, they’ll perform either a soft or hard pull on your credit history, verify your income and ask about monthly payments on debt obligations.
Need just a little cash? Some things to know about small personal loans.
Alternatives to guaranteed personal loans
Before getting a loan that’s saddled with more cons than pros, check out these alternatives.
Look into payday alternative loans
These small loans, typically up to $2,000, can be paid back over one to 12 months. Offered by federal credit unions, they’re a safer bet than traditional payday loans, because credit unions cap application fees at $20, won’t charge interest rates over 28% and can’t roll the loan over into a new loan.
If you’re considering getting a payday alternative loan from a specific federal credit union, check whether it reports payments to the credit bureaus. When a lender reports your on-time payments to the credit bureaus, your credit scores can improve, which could allow you to qualify for better loan products in the future.
Get a co-signer
Having a trusted friend or family member co-sign your loan can improve your chances of qualifying. But it comes with one big risk: The co-signer will be equally responsible for the debt. That means if you miss payments, it can negatively affect both of your credit scores. In that case, your friend or family member may be more comfortable loaning you money or agreeing to cover a payment if you’re in danger of missing it.
Improve your credit
If you can hit the pause button on applying for a loan and take some time to work on your credit, your chances of getting approved for a financially sound loan will likely improve. Here are some strategies.
- Make on-time payments on existing accounts.
- Pay off some of your credit card debt to lower your credit utilization.
- Avoid applying for new credit, as hard credit checks can ding your scores.
- Report on-time utility and cellphone payments to the bureaus through a credit-building tool to build positive credit history.
In the meantime, shop around for better loan offers. Some lenders can do a prequalification check and let you know whether you may be approved for a loan, as well as what the terms might be. Prequalification checks, in which the lender performs a soft credit check, typically doesn’t hurt your credit. Knowing what the lenders require can help you focus your energy on improving your scores.
Use a credit card
Using a credit card can sometimes be better than taking out a guaranteed personal loan. Credit card interest rates are typically lower than payday loans — as of August 2020, the national average credit card interest rate was 14.58%. But if you plan to use a credit card for a financial emergency, be sure to check the cash advance fee and interest rate, and always make monthly payments on time and in full.
Talk with a credit counselor
Nonprofit organizations often offer low-cost credit counseling, which can help you figure out loan terms, budgeting and finding affordable loans.
With their typically high interest rates, hidden fees and short terms, guaranteed personal loans can lead you into a cycle of debt. Try looking for an alternative first, and working to improve your finances so you can avoid expensive loans in the future.
Building your credit can help you eventually qualify for a personal loan that involves a credit check. These loans typically come with better terms than their “guaranteed” counterparts. From there, your good credit habits can save you money in the long term.