Understanding the risks of taking out a cash loan

By Matt Mayerle
Modified on June 7, 2023
Understanding the risks of taking out a cash loan

When looking for a fast financial solution, borrowers may think that a Quick Cash Loan, like a payday loan or cash advance, is the most convenient option. However, these types of funding often come with hidden fees, a low loan amount, and brief repayment periods. You may find that taking out a personal loan is a much more sustainable financial solution than cash loans. 

Here, you will learn about the different types of cash loans available and how they may affect your finances. From there you can consider your other options to decide which financial product will work best for you.

Types of Cash Loans

Below are some of  the most popular types of cash loans you may come across when you need to borrow money. 

Credit Card Cash Advance

Consumers can use their credit cards to withdraw cash using their existing credit limit. Cash advances with a credit card work similarly to regular credit purchases in that the amount taken out will be added to the consumer’s monthly balance. But, interest rate charges on cash advances are often higher than those charged on standard credit card transactions. 

Payday Loans / Payday Cash Advances

A payday loan is a type of cash advance loan meant for people looking for small loan amounts they can pay back within about two weeks. Since payday loans come in such low loan amounts, they also have very short repayment terms. If you don’t want to deal with short repayment schedules and high-interest rates, you may want to say away from this type of cash loan.  

Employer Cash Advances

If your employer is willing to extend an advance on your paycheck, you may be able to utilize an employer cash advance to take care of your expenses. However, keep in mind that employer cash advances are only meant for extreme financial emergencies where no other options are available. 

Mobile App Cash Advances

Consumers may also be able to access cash loans with payday advance mobile apps. Keep in mind that cash loan mobile apps often come with strict requirements like bank account minimums, credit score minimums, and more. 

Possible Risks That Can Come With Cash Loans

While cash loans are popular amongst consumers looking for quick funding, they also come with many risks. It’s essential to understand all the possible risks that can come with cash loans so you can make well-informed financial decisions for yourself. 

A Decline in Credit if Borrowers Cannot Pay

Cash loans can be quite risky, which puts borrowers at risk of missing or making late payments. When borrowers don’t keep up with the payment plan defined in their loan agreements, they may see a significant decline in their credit score. Unfortunately, just one missed payment can end up lowering a borrower’s credit score for up to seven years.  

High-Interest Rates/Annual Percentage Rate

Since they are part of the subprime market, many cash loans come with extremely high-interest rates. These rates are meant to offset the financial risk lenders take by approving funding to borrowers who may have credit scores on the lower side. 

Personal loan interest rates, on the other hand, are known for being more competitive, which means you may be able to lower the total cost of your loan.   

Small Funding Amounts

Cash loans typically come in small funding amounts of a few hundred dollars or less. Unless you are dealing with a minor financial emergency, a cash loan may not offer enough funding to provide you with the financial relief you’re looking for. 

Additional Fees Like Prepayment Penalties

Cash loans are also known for coming with hidden fees or inconvenient charges like prepayment penalties or balloon payments. Prepayment penalties are a fee lenders charge when borrowers make their loan payment before their due date, and balloon payments are a large sum of money due at the end of a loan. 

Possibly Taking on Unnecessary Debt

Since cash loans are so quick, it’s easy for borrowers to get locked into a contract before they’ve had time to really think about their loan needs. This puts borrowers at risk of accruing unnecessary debt that does nothing but put a drain on their finances. 

Potential To Fall Into a Cycle of Debt

Borrowers who don’t keep up with the short repayment terms may end up with interest rates that actually cause their loan balance to go up from month to month. This can leave borrowers in a cycle of debt that is extremely difficult to get out of, especially if they live off of a strict budget or low income. 

How To Minimize the Risk of Taking Out Cash Loans

If you decide that a cash loan is a right choice for you, you may want to take advantage of the following tips to help you minimize the risk these loans can come with. 

Research Lenders

Smart borrowers will always research lenders and loan products before submitting any kind of application. Furthermore, when you decide on a lender and start the approval process, it’s important to be thorough and read the fine print before you sign your funding agreement. Make sure you feel comfortable with the terms and conditions of your loan before you commit. If you have any questions or concerns about your loan contract, you can ask your loan agent for clarification on anything you need. 

Shop Around and Compare Offers

It’s also important to shop around and compare offers/deals. By going with the first option you come across, you could miss out on a potentially better deal. You may find that some lenders charge certain fees that others don’t or that some lenders are willing to accept applicants with lower credit scores while other are not. When comparing products and offers, be sure to ask lenders if they include any kind of fees or charges like a loan origination fee, balloon payments, or prepayment penalties. 

Develop a Repayment Plan

Having a payment plan in place could end up being a lifesaver in making sure you are able to pay back your loan on time. Include your loan in with your budget to make sure your monthly payments will fit in with your existing financial obligations. 

Consider Signing Up for Autopay or Setting Payment Reminders

Making on-time payments is an essential component of any type of loan, but especially cash loans. By making your scheduled payments on time, you can ensure you don’t get stuck with late payment fees or other charges that can make your loan harder to pay off.  

To make keeping up with your payments even easier, you may consider signing up for automatic payments, also known as autopay, where your monthly minimum is taken out of your bank account automatically on your loan payment’s due date. If you don’t want money to be taken out of your account automatically, you may also consider setting payment reminders on your computer or smartphone.

Personal Loan Alternatives To Cash Loans

You can access personal loan alternatives via financial institutions like banks, online lenders, or credit unions. Below are a few types of personal loan alternatives you may consider before you jump into a cash loan. 

  • Personal Installment loans: Personal installment loans are a type of personal loan where funds are distributed to approved borrowers in one lump sum. From there, borrowers can repay their loan balance in equal monthly payments. 

While personal installment loans may come with some extra charges, like origination fees, they almost never come with major inconveniences like prepayment penalties or balloon charges. Furthermore, since installment loans don’t require borrowers to have collateral, they are considered unsecured loans. 

  • Debt Consolidation Loans: If you have multiple loan balances, overwhelming credit card debt, high-interest student loan debt, etc., you may consider consolidating debt with a single loan. Getting a debt consolidation loan can be a great way to reduce the number of monthly payments you are making and may even help you save money on interest rate charges as well. 
  • Auto Title Loans: Title loans, also called auto title loans or car title loans, fall under the umbrella of secured loans. With title loans, borrowers use their vehicle title as collateral and allow their lender to sign on as a lienholder for the duration of their loan period. Similar to a payday loan, car title loans usually also always come with low loan amounts and extremely high-interest rates. 
  • Home Equity Loans or Home Equity Lines of Credit: If you are the owner of a home or piece of land, you can use the equity in your property to secure a home equity loan or a home equity line of credit. Since the equity in homes/property is usually quite high, funding amounts for home equity loans and lines of credit are typically on the higher side as well. 
  • Small Business Loans: If you are a business owner you may consider getting a business-specific loan to pay for your expenses. Business loans like microfinancing or merchant cash advances can help you pay for business expenses such as payroll, rent for your brick-and-mortar business location, inventory, etc.

Non-Loan Alternatives

You may even find that you don’t need to apply for a loan in order to take care of your expenses. Before applying for a loan, you may want to consider some alternatives, such as: 

  • Dipping into your savings account or emergency fund. 
  • Asking a trusted friend or family member for an interest-free loan. 
  • Having a garage sale or selling unwanted items to earn extra cash. 
  • Getting a temporary part-time job to earn additional income. 

Advantages and Disadvantages of Personal Loans Over Cash Loans

Below are some of the pros and cons of personal loans compared to cash loans.

Personal Loans Can Give You More Time To Pay

Since cash loans were designed to be a quick fix for borrowers, they often come with short repayment terms. Many borrowers who don’t pay back their cash loan balance on time find themselves stuck with unmanageable interest rates that make their loans even harder to pay off. Personal loans avoid this inconvenience by coming with flexible repayment terms. 

Personal loans can come with varying repayment terms that can rely on loan factors like the funding amount, minimum monthly payment, and the borrower’s credit history. Borrowers can also work with their loan agents to come up with a payment schedule that both the borrower and lender feel comfortable with. 

Personal Loans Come With a Diversity of Financial Products 

Cash loans come in just a few limited forms, but there are a wide variety of financial products that qualify as personal loans. Everything from installment loans to bad credit loans and even debt consolidation loans are under the umbrella of personal loans. With so many options to choose from, borrowers can find funding that works well with their personal budgets, which can mean something different for each consumer, depending on their current financial situation. 

Many Personal Loans Have Flexible Repayment Terms

As discussed, the flexible repayment terms can make personal loans much more manageable and convenient to pay off compared to most cash loans. Another perk of personal loan repayment terms is that they can also come with special refinancing perks. Many personal loan lenders will give borrowers a break on interest rate charges or even include additional funding if they decide to refinance their original loan. 

Personal Loans Come in High or Low Loan Amounts

Personal loans may be better tailed to a wider variety of consumers’ budgets because they can come in either high or low loan amounts. Borrowers can access personal loans that come with funding amounts ranging from a few hundred dollars to a few thousand dollars. 

Personal Loans May Have a More Thorough Application Process

While personal loans have many advantages borrowers can enjoy over cash loans, they may also come with a more thorough application process. Lenders for quick cash loans often just ask borrowers for their names and basic information before they send approved funds. Personal loan lenders tend to be a bit more thorough so they can make sure they are connecting borrowers with financial products that will work well with their lifestyle and budget. However, a more thorough application doesn’t mean it’s more difficult. Borrowers can often get through a personal loan application in just a few minutes, especially if their documents are prepared beforehand. 

Bottom Line: Cash Loan Risks

While cash loans can be a quick way to get fast funding, they come with plenty of risks that may leave borrowers in a worse financial position. After doing your own research on lenders and financial products, you may find that personal loan risks are much more manageable compared to their cash loan counterparts. 

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