If your credit score is not perfect and you are in financial trouble, a guaranteed personal loan could be a lifesaver. These loans may not be as easy as they seem.
Most likely, you’ve seen personal loans guaranteed to provide quick cash. They are easy to apply for and require no credit checks. Although the name suggests that you will be approved, it is not how it works. Most lenders will require you to prove that you have income before they approve your loan application.
We’ll take a look at the process of guaranteed personal loans and offer some suggestions.
What is a personal loan that can be guaranteed?
Lenders often refer to short-term loans such as payday loans or other short-term loans, PaydayNow guarantees it. People with poor credit or low income are most likely to be offered guaranteed personal loans. This loan is often considered predatory because it benefits the lender, with high interest rates and fees.
As collateral for a payday loan, you will need a postdated check, authorization to debit funds from your bank, credit union, or prepaid card account. The loan amount is typically between $100 and $1,000, and due the day after you get your next paycheck. Lenders can charge fees up to triple-digit APRs.
It is difficult to repay the entire amount due to short loan terms (usually less than two weeks) and high APRs of up to 400%. You may need to transfer unpaid balances into new loans. A payday loan can be a great option if your finances are already tight.
Short-term installment loans are another common type of guaranteed personal loan. These loans are typically shorter in repayment terms, with periods ranging from a few months up to a few decades. However, they still carry high APRs.
A guaranteed personal loan
A payday loan typically charges a $10-30 fee per $100 borrowed. You’ll pay an APR of almost 400% if you borrow $300 to repair your car. The lender will charge $15 per $100 borrowed. Your total cost is $345 at this point. The Consumer Financial Protection Bureau estimates that nearly one-fourth of initial payday loans are rolled over nine times. Fees alone can reach $400 if you have to pay nine times for a payday loan.
What should you be paying attention to
These red flags should be avoided when shopping for a loan.
- High interest rates: You should be able to repay your loan on terms that are realistic. While you are considering your loan terms, calculate your monthly payments. Ask yourself if you are able to repay the loan on time before signing up for a loan.
- Avoid unscrupulous lenders: Stay away from lenders that aggressively market to you and won’t answer any of your questions. They may also pressure you into taking out a loan or borrowing more money than you can afford. Look up potential lenders on the Consumer Complaint Database of the Consumer Financial Protection Bureau before you approach lenders to discuss loan options.
- Hidden or high fees: Hidden fees are difficult to find by nature. It is important to understand the fine print to find out what fees might be due and whether they are manageable. Other than interest costs, there are common legal fees such as origination fees (typically between 1% and 8% of the loan) or prepayment penalties.
- There is no credit check. Lenders who are legitimate base credit decisions on your ability and willingness to repay the loan. They’ll typically perform a soft- or hard pull of your credit history, verify income, and inquire about monthly payments on debt obligations.
Do you need a little extra cash? Here are some facts about personal loans for small amounts.
Alternatives for guaranteed personal loans
These alternatives are better than a loan with more pros than cons.
Check out payday loans
These loans are typically between $2,000 and $3,000 and can be repaid in one to twelve months. Federal credit unions offer these loans. They are safer than traditional payday loans because they have a $20 application fee and don’t charge interest rates above 28%. Credit unions can also not roll over the loan into another loan.
You should check to see if the federal credit union reports your payments to credit bureaus if you are considering a payday loan alternative. Your credit score can rise if a lender reports on-time payments to credit bureaus. This could help you qualify for more loan products in the future.
Get a co-signer
Your chances of qualifying can be improved by having a friend or family member sign your loan. However, this comes with a big risk. The cosigner will also be responsible for the debt. This means that if you fail to pay your debt on time, it could negatively impact both of your credit scores. If you are in danger of not paying your payments, a friend or family member might be more willing to lend you money or cover the payment.
Increase your credit
Your chances of being approved for a financial sound loan increase if you are able to hit the pause button when applying for a loan. These are some tips.
- Pay on-time on accounts that are already open.
- To reduce your credit utilization, you can pay off some of your credit cards debt.
- Do not apply for credit cards. Hard credit checks could damage your credit score.
- To build positive credit, you must report on-time phone and utility payments to the bureaus.
You can still shop around for lower loan rates. A prequalification check can be done by some lenders to determine if you are eligible for a loan and what the terms may be. Prequalification checks are a lender performing a soft credit check that doesn’t usually affect your credit. It is possible to focus your efforts on improving your score by knowing what lenders want.
Get a credit card
Sometimes, a credit card is better than a personal loan. Payday loans have higher interest rates than credit cards, with the average national credit card interest rate at 14.58% as of August 2020. If you are looking to use your credit card to fund a financial emergency, make sure to review the cash advance fee as well as the interest rate. Also, ensure that monthly payments are made on time.
Talk to a credit counselor
Many non-profit organizations offer low-cost credit counseling that can help you plan your budget, find affordable loans, and negotiate loan terms.
Bottom line
Guaranteed personal loans can trap you in a cycle of debt due to their high interest rates, hidden fees and short terms. Look for alternatives and work to improve your finances in order to avoid costly loans in the future.
Credit building can help you qualify for a personal loan. This will require a credit check. These loans often have better terms than their “guaranteed counterparts.” Your good credit history can help you save money over the long-term.
