Small Loans and Your Options
By: TRAVIS SMITH
It's common to face financial challenges in life, and at times many people simply don't have the money to pay their expenses. If you find yourself in this situation a small loan can be a great way to quickly get the money you need. Small loans offer a variety of choices ranging from relatively cheap to very expensive. If you are considering a small loan you should first determine your own personal factors which will help you decide the option that works best for you. Such factors include how quickly you need the money, your credit rating and the amount of money you require.
A small loan is typically in the range of $50 to $15,000. There are four main types of small loans that are readily available if you qualify. They are payday loans, personal loans, pawnbrokers, and credit cards. Each is much different than the next, so it is important that you understand what each entails. To help you determine the option that best meets your needs all four types are discussed in detail below.
Option #1: Payday Loan
The first type of small loan is a Payday Loan. Payday loans are short term loans of one month or less. It is called a payday loan because it is typically a loan of equal or lesser value of your bimonthly paycheck that must be paid back upon the date you are paid by your employer. Essentially it gives you short term money to pay your bills until you receive your next paycheck.
There are two ways to obtain a payday loan, either from a retail payday loan store or through the internet. Payday loan stores are often found in your community and have an advantage over internet payday loans in that they give you added security and direct contact with your lender. However, payday loans are not legal in all states. States that do not allow payday loan stores are:
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If you live in a state that payday loans are illegal you are still able to obtain an internet payday loan. Internet payday loans can often be obtained within minutes through a variety of websites. However, you will want to make sure you find a trusted lender as internet payday loans are more prone to scam and fraud. But there are plenty of honest internet payday lenders out there.
Payday loans are typically in the range of $100 to $2,500 and require that you have a checking account, recent bank statement and write the issuing agency a post dated check or allow an automatic withdrawal. Upon presenting the issuing agency with these documents and verification you can receive your money in a very short time, usually within an hour. Once your cash is in hand you begin paying interest and will be expected to pay the loan back in full upon receiving your paycheck.
Unfortunately the convenience of receiving the cash you need quickly does come with a high interest rate. A typical payday loan will carry an annual percentage rate (APR) of 390% to 700%. While that may sound high, payday loans are short term so this equates to 15% to 30% of the loan over two weeks. Meaning, for every $100 you borrow you can expect interest of $15 to $30.
If at the end of your loan term you are unable to pay back the loan then you can often receive an extended payment plan. Extended payment plans simply rollover your current interest rate for another two weeks. So if you paid $15 in finance charges for the first two weeks, that same finance charge would be rolled over for another two weeks and you would end up paying $30. If you don't set up a rollover with your lender you will have to also pay a bounced check fee to your bank.
Payday loans become a very expensive option for borrowers that don't make their payments on time. It is estimated that the average borrower of a payday loan worth $250 will pay back $793 as a result of extensions, late fees and interest. Thus the fees and interest rates are distinct disadvantages related to payday loans.
However, payday loans can be very useful if you find yourself in a short-term cash crunch. If paid back in time the fees are not overwhelming and most lenders will loan out to individuals with poor credit ratings. Payday loans provide an option to obtain cash for individuals who don't have the credit rating to get loans elsewhere.
| Comparison of the four different types of small loans: | ||||
|---|---|---|---|---|
| Payday Loan | Personal Loan | Pawnbroker | Credit Card | |
| Credit Requirements | Loose | Strict | Loose | Strict |
| Interest Rate (APR) | 390% to 780% | 7% to 20% | 120% to 300% | 14% to 24% |
| Collateral | None | Secured -- None Unsecured -- Asset | Asset | None |
| Convenience | Less than 1 hour | Up to 15 days | Less than 1 hour | 7 to 10 days |
Option #2: Bank or Credit Union Loan
For people with a good credit rating a personal loan from a credit union or bank can often be a good option. Personal loans can often be obtained in the range of $1,000 to $25,000 and often require that you are a customer of the bank or credit union issuing the loan. There are two different types of personal loans: secured and unsecured.
Secured loans are loans secured by some asset you own such as a car. Alternatively, an Unsecured loan does not have to be backed by an asset. A secured loan offers one advantage over an unsecured loan in that you can receive a lower interest rate than if you would have an unsecured loan. However, it is important to know that the lender will require your property as collateral and should you default on the loan the bank will seize your collateralized asset. If you are confident you can pay back the loan then a secured loan will be cheaper -- just make sure that you do not default or it will be much more expensive.
Many people obtain personal loans to pay for unexpected expenses such as a large tax bill or expensive car repairs. However, the lender does not care what the personal loan is for and the cash can be used on anything you please once you are approved.
To be approved for a personal loan you will need a credit check and in almost all cases will need a good credit rating. Additionally, if you obtain a secured loan you will typically have to pay an origination fee; unsecured loans do not have origination fees.
Personal bank loans offer very low interest rates in comparison to other types of small loans. Banks typically offer APRs ranging from 7% to 20%. Personal loans can also be issued for a much longer amount of time, up to 84 months. Should you decide you want to pay your loan back early most banks won't charge a prepayment penalty.
Personal loans are not for everyone as they do require you pass a credit check and hold an account with a bank. In most cases that will mean you have to prove you have stable income and are likely to pay back the loan on time. Additionally personal loans take considerably longer than other options. Once you are approved it can take up to 15 days to receive your loan.
Option #3: Pawnbroker Loan
Pawnbrokers are individuals or businesses that offer loans to customers that are secured by some personal property of the borrower. As the name indicates, a pawnbroker is derived from a pawn shop. A loan from a pawnbroker can be obtained at most pawn shops. Similar to other pawn shop items pawnbrokers are willing to take a wide variety of property as collateral on their loans. Some examples include: gold or diamond jewelry, musical instruments, televisions, tools, household items or any other valuable product that will hold its value over a reasonable amount of time.
A typical pawnbroker will give you a loan for 30% to 50% of the value of the item your loan is secured by. For example, if you have a $1,000 diamond ring a pawnbroker will give you a loan ranging from $300 to $500, depending on the store.
Similar to a secured loan, a pawnbroker considers your asset as collateral and should you not repay your loan they have rights to your asset. Once it is determined the borrower has defaulted and will not pay the loan back the pawnbroker will then sell the item in their store to recoup the money left unpaid on the loan.
Similar to payday loans pawnbrokers are a good option for people with poor credit ratings. They do not require a credit score or a bank account and you can often get your loan within an hour. Also, should you not be able to pay back your loan your credit score will not be damaged, however, you will lose your asset. Pawnbroker loans are typically for a month and in most cases you can rollover your debt.
A disadvantage to a pawnbroker is that they charge very high interest rates, with typical APR's ranging from 120% to 300%. It is also important to note that if you don't pay back your loan you will be giving the pawn shop your asset for 30% to 50% of its value, plus any interest you paid. Like a secured loan, you will want to be confident that you are able to pay back your loan or alternatively cope with the loss of your property.
Option #4: Credit Card Loan
A final option for a small loan is a credit card. Although you may not think of it as a small loan, a credit card in and of itself is a small loan. Credit cards allow you to charge against your credit limit for an unlimited time as long as you make the minimum payments.
A credit card can be obtained from any bank but does require a credit check before you can be approved. Credit cards take longer to approve than other options, typically three to five business days. While credit limits vary depending on the bank and the borrower, a typical beginning credit limit is $1,000. This makes for a flexible option for a person who quickly needs to pay off $1,000 or less in bills.
Once you have your card in hand you are able to use it anywhere your card is accepted. However, a credit card by nature will not allow you to withdraw cash should you need cash. Credit cards do offer an alternative to this, a credit card cash advance.
A credit card cash advance allows you to withdraw cash from an ATM similar to a debit card. However, an important distinction is that with a debit card you withdraw cash you currently have in your checking or savings account. With a cash advance you take out a loan for cash that you do not currently have.
Not all credit cards allow cash advances so you will need to check with your bank. Cash advances typically carry a fee of 2% to 4% of your total advance. Additionally, they typically charge higher interest rates than most credit cards and begin charging interest as soon as the cash is in your hand.
Compared to other small loan options credit card and cash advance interest rates are reasonably low. A typical APR will fall between 14% and 24%, depending on your bank and credit history. Also, depending on the type of card you get, some will have annual fees that you should be aware of. Most credit cards do not carry annual fees; however, annual fees are more typical for borrowers with bad credit and can have fees in the range of $25 to $100.
When considering a small loan it is important you find the type of loan that blends best with your personal situation. Ideally, you will want a loan with the lowest interest rate and lowest fees. However, depending on your situation you may have to sacrifice fees and interest rates in favor of lenders willing to give money to borrowers with low credit scores. Generally speaking credit cards and personal loans are favorable for individuals with good credit while payday loans and pawnbroker loans are more viable options for individuals with bad credit. No matter what loan fits your financial situation best it is important that you understand all terms and options associated with your loan. Understanding your small loan will prevent you from incurring unnecessary expensive rates and fees and ultimately save you money.