We’ve all experienced times in our lives when we need quick cash. We might have an unforeseen emergency or need to provide help to a loved one who’s in need. When these things occur, many people turn to a quick cash same day or next day loan because they’re readily available and require minimal effort.
At Addition Financial, we want our valued members to be protected from predatory lending practices. For that reason, we think it’s essential to explain the risks associated with next day or same day loans, and provide you with some precautions to take before you get one. Here’s what you need to know.
Next day loans and same day loans are essentially the same thing. They’re quick personal loans where the direct lender promises you a cash advance either the same day you apply or the next day – in other words, within 24 hours. These loans may be payday loans, which advance money against your next paycheck, or car title loans, which use your vehicle as collateral.
The appeal of same day and next day loans is undeniable. If you’ve ever experienced the feeling of facing an unexpected expense, such as a high-cost car problem or a family emergency, you know how upsetting it can be. When someone promises to get you the money you need quickly, it feels like a relief. However, that feeling of relief comes at a cost that you may not be able to afford.
The basic requirements for a same day or next day loan are simple. To be approved for a short term loan, you must meet the following criteria:
In 2017, the Consumer Financial Protection Bureau instated underwriting guidelines that would have required lenders to assess a borrower’s ability to repay the personal loan before granting one. However, that protection was rescinded under the Trump administration. The protection that prevents lenders from making repeated attempts to recoup money by taking it from the borrower’s bank account remains in place.
One of the most common lending questions we get asked is whether next day loans are safe. The short answer is that in most cases, they are not. While the instant approval process and the ability to get an emergency payday loan even if you have bad credit or a short credit history might be appealing, it comes at a cost that is too high for most people.
The interest rates on same day loans, when they are not closely regulated, are astronomically high. The average rate across the United States is 391% and may be as high as 600% in some areas. 18 states, mostly on the East Coast, have legislation imposing caps on quick loans. However, many states offer limited or no protection to consumers. That includes Florida, where the average rate is 304% according to CNBC.
Many people who take out payday or same day loans find themselves caught in a vicious cycle of borrowing. Because the interest rates are so high, when they receive their next paycheck, they need another cash loan to pay back the first one. That’s the reason that most people in the financial industry recognize these quick loans as predatory. They are designed to take advantage of borrowers.
Now that you understand what quick loans are and how they work, let’s talk about the five precautions you should use before getting one.
The first thing we suggest is researching your state’s laws regarding lending in general and predatory lending, in particular. There are 24 states that have no regulation of predatory loans and no protection for consumers, including Florida.
If you live in a state that offers no protection at all, we strongly recommend that you avoid taking out a same day loan.The interest rates are likely to be exorbitant and there’s a strong probability that you will get caught in the vicious cycle we talked about earlier in this article.
The next step, assuming you’re still considering an instant loan, is to research potential lenders. A Google search is a good place to start. Read about the lenders you’re considering and find out what watchdog groups and customers say about them. If your state requires licensing, make sure that any reputable lender you approach is properly licensed.
Be skeptical when it comes to online reviews. A non-profit did some research about reviews of payday lenders and found some things that caused concern. Many of the reviews read like professionally-written advertising copy and were probably not legitimate. Some of the review sites are cozy with the lenders they review, and when lenders pay to be listed there, there’s a good chance that they’re manipulating the ratings.
Perhaps the most important precaution you can take before submitting a loan application to a quick loan is to read the fine print. You should be sure that you understand the loan origination fee and interest rate, as well as what the company will do to collect, before you sign on the dotted line.
We should note here that it’s the short-term nature of these loans that makes the interest rates they charge problematic. You might find a payday lender who will lend you money and charge $15 per $100 you borrow. That’s a 15% interest rate. But, since the term of most quick loans is 14 days, it translates to an astronomically high annual percentage rate because you accrue the full 15% in just two weeks. With a traditional loan, 15% would still be high but at least the 15% would accrue annually and not biweekly.
After you read the fine print, we suggest that you do the math to make sure that you understand how much you will be required to repay. A lot of people don’t take this step and it’s why they end up being victimized by predatory lending practices.
According to the Consumer Financial Protection Bureau, the median payday loan is $350 and the median interest rate is 15%. When annualized, the amount paid is 391%. The same study found that 80% of all borrowers could not complete the repayment term of their initial loan amounts and “rolled over” into a new loan.
Crunching those numbers, if you borrowed $350, you would end up paying back $1,368.50 on an annual basis. People who continually borrow tend to need more money with subsequent loans simply to pay the interest on the previous loan, meaning that they pay thousands of dollars a year.
The best advice we can give you about same day or next day loans is not to get them. There are alternatives available and finding them can save you thousands of dollars.
Our first suggestion is to talk to your credit union or bank. While you might not get the lowest interest rate if you have a low credit score, there are loans and credit cards designed for people with low credit scores that can give you some breathing room financially without getting caught in that vicious cycle we talked about. At Addition Financial, we’re always happy to talk to our members (and prospective members) about how to get the money they need at rates they can afford.
If you need money to pay medical expenses or utilities, keep in mind that most companies will work with you to come up with a payment plan. Some people panic when they get a bill thinking they need to pay it all at once. However, in many cases, there’s room for negotiation without the need for an emergency loan. People want to be paid and they’re happy to work with consumers to make that happen.
Another option would be to go to a friend or family member for the money you need. While there are still some precautions you should take – such as putting the loan agreement terms in writing – you may be able to get funds quickly and without a lot of fuss if you turn to someone you know.
While it can be stressful to make phone calls to arrange payment plans or ask someone you know for money, the risks associated with payday loans make these options far preferable to paying the high interest rates that payday lenders charge.
What we hope you’ll take away from this article is that same day and next day loans are risky and predatory, and not a good idea. You might need to get money quickly, but there are alternatives available and they are usually better in the long run than a quick loan would be.
Do you need help managing your money? Addition Financial is here to help! Click here to read about our loan options and the benefits of membership.