Fast Cash Loans: What Are The Pros and Cons?

Posted on April 17, 2021 in Loans

Whether the result of a medical emergency, surprise home expenses, or just the accumulation of bills, most of us will experience some financial struggles at some point in our lives. Looking for additional cash to help fix the problem may end up being a larger issue. 

While there are plenty of people lucky enough to have family and friends that can help in case of an emergency, that’s not always the case for everyone. If you find yourself in need of some money, without anyone to help you out of it, then you may be considering a fast cash loan, also known as a payday loan. 

What Is A Fast Cash Loan?

A fast cash loan, more commonly known as a payday loan, is a small dollar loan that is usually between $100 and $1,500. The term for repayment is typically due in a single lump payment on your next payday, generally within two weeks. These types of loans have several different names, so you may know it by another term:

  • Payday loan
  • Cash advance
  • Short term loan
  • Payday advance loan
  • Fast cash
  • Fast loan
  • Bad credit loan
  • Deferred deposit transaction
  • Paycheck advance

These loans will typically target people with poor or no credit, or those without much financial literacy, who will need access to cash immediately. They are often highly predatory in nature, but for those with bad credit or no credit and no other options, what other choices are there for quick cash in an emergency? 

The Pros Of A Fast Cash Loan

There are some pretty good points in favor of taking out a fast cash loan. Some of these reasons are so attractive that lots of people will turn to them, even despite the consequences.

Easy Application

Arguably the number one advantage of a payday loan is how easy they are to access. In fact, most fast cash loan lenders will promise access to the cash within 24 hours along with an immediate lending decision on the loan.

Simple Requirements

Unlike more traditional personal loans from banks or credit unions, fast cash loans will have fewer requirements in order to apply. In general, all you will need in order to apply and be accepted is:

  • Be at least 18 years of age
  • Have a government issued ID or Social Security number
  • Have a regular job or source of income
  • Have access to an active bank account

No Credit Check

Most traditional loans will require good credit in order to be approved, but payday loans don’t require any information about your credit history. Since they will not be looking into your credit, that will also mean there will be no hard credit inquiry, which can hurt your credit score and lower it by several points. 

It’s Unsecured

Unlike a car title loan, traditional auto loan, or mortgage, fast cash loans are not secured by any of your personal property. Those types of loans mean that if you default on repayment and fail to repay, the lender can legally seize the property in order to get their money back. While a fast cash loan is not secured, payday lenders will still have access to your bank account as a condition of the loan, which is an entirely different kind of risk. They will also be able to take other measures, such as sending your debt to collections or suing you over the outstanding balance.

The Cons Of A Fast Cash Loan

When it comes to fast cash loans, there are definitely more cons than pros. Some of the disadvantages of taking out a fast cash loan include:

Extremely High Interest Rates

Depending on the state that you live in, a fast cash loan could have an interest rate averaging 400%. In comparison, a personal loan will only charge between 4% to 36% and credit card interest is only usually 12% to 30%. While the details will vary depending on state, they will usually range from “overpriced” to “very expensive”. For example, a $500 loan in Miami, Florida will accrue $55 of interest charges over the course of 14 days for a total Annual Percentage Rate (APR) of 286.78%. However, the same loan of $500 in Austin, Texas will accrue $102.27 in interest charges over a 14 day period for an incredible APR of 533.26%. 

In comparison, a $500 loan with a 30% APR, on the high side of a traditional loan, would only result in an extra $25.12 in interest over the course of 90 days. So not only would you have 6.5x the amount of time to repay the loan, but it would be $29.88 cheaper in Miami and $77.15 cheaper in Austin. However, many traditional lenders will require a minimum credit score in order to qualify for a loan, even those with their highest interest rates. 

Predatory Lending Practices

A predatory loan is defined as having unfair, misleading, or unaffordable terms that will often result in trapping its users in a cycle of debt. Fast cash loans are typically viewed as a predatory loan because of their high costs that can escalate very quickly. Some of the warning signs of a predatory loan include:

  • A lender not checking whether you can repay the loan or not. If you are unable to repay the loan, you may be forced to roll the loan over into a new loan, complete with severe fees and penalties.

  • The loan does not help to build your credit. If the loan provider does not report to any of the three major credit bureaus (TransUnion, Experian, or Equifax), this is usually a warning sign. If you don’t know whether or not they report to the credit bureaus, make sure you ask and find out.

It’s Easy To Get Trapped

Every time that you roll over or extend a loan, the payday lender will charge exorbitant additional fees, which will increase the out of pocket costs for taking out the loan. In fact, almost one out of every four fast cash loans will be borrowed more than nine times. Rolling over the loan can also significantly increase the amount of time that it takes to repay the loan, sometimes adding months or even years to the original two week term.

They Will Have Access To Your Bank Account

In order to gain access to a fast cash loan, borrowers will often be required to grant the loan lender access to their bank account. While setting up a direct deposit in order to make bills and loan payments is fairly common now, this account access will work much differently. Most fast cash lenders will require that you write a postdated check, in this case a check that is dated to be cashed after your next payday, whenever you get the loan. 

If you don’t have enough money in your account when they cash the check, you will face expensive overdraft fees and a fee for insufficient funds from your bank in addition to returned or failed payment fees from the lender. 

They Don’t Help Your Credit

Since fast cash loan lenders rarely report to credit bureaus, a signature trait of a predatory loan, they will not help your credit. Similar to how medical debts work, fast cash loans will usually only report your debt to the credit bureaus in the event that your loan is sent to collections. So while a fast cash loan will help you to build your credit, it could hurt your credit if you don’t repay it.

The Takeaway

While there may be a few positives and pros to a fast cash loan, there are a lot more consequences and cons for them. It’s best to only consider this option if you are truly desperate, as the risk and dangers are pretty substantial. 

If you find yourself in desperate need of money, you should probably consider all other possible options first before turning to a fast cash loan. These loans are easy to come by, but they can often be very difficult to be rid of. If you have to take out a fast cash loan, then make sure you pay it back on time, as the consequences of defaulting on this loan can lead to severe financial troubles.

SOURCES:

https://www.investopedia.com/terms/a/apr.asp

https://www.thebalance.com/get-out-of-the-debt-cycle-4054269#:~:text=A%20debt%20cycle%20is%20continual,your%20debt%20increases%20even%20faster.

https://www.experian.com/blogs/ask-experian/what-is-a-hard-inquiry/#:~:text=A%20hard%20inquiry%2C%20or%20a,can%20affect%20your%20credit%20score.

https://easyreadernews.com/the-pros-and-cons-of-using-a-payday-loan-as-a-quick-cash-solution/

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