It’s easier than ever to borrow money by finding short-term loans online, but should you? Although convenient, these products aren’t always a good idea for everyone. Below are a few pros and cons of online short-term loans to help you consider whether they’re right for you.
Pros of Short-Term Loans Online
No financial product comes free, and short-term loans online have their own set of pros and cons. Pros of short-term loans online may include:
- Easy to compare
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Pro # 1: Fast
Here’s what that means more specifically. Since you can search and apply for short-term loans online, the process can be much faster than if you were to drive around to different lenders. What’s more, the loans are often able to be funded within 24 hours.
Pro #2: Convenient
Convenience plays into this same factor. You can basically compare and contrast various short-term loans from the comfort of your own home, not to mention the fact that you can apply anytime, day or night.
Pro #3: Easy to Compare
Finally, the fact that you can find the loans online at your convenience means you can compare and contrast them without the pressure of someone trying to get you to close a deal. You can gather various details of different loans — from rates to fees to loan amounts and more — and take your time deciding which one might be right for you. That would be much more difficult to do in person, since you’d have to gather their paperwork and go to various lenders to get all the information.
Cons of Short-Term Loans Online
Fast, convenient, and easy to compare are great pros, but there are certainly cons to be aware of as well when it comes to short-term loans online. Here are a few to consider:
- Potentially expensive
- Harder to validate as legitimate
- Can be difficult to know who’s really getting your information
Con #1: Potentially Expensive
The first con applies not only to short-term loans online, but also to short-term loans in general. Compared to a traditional loan, short-term loans can have interest rates that start in the teens and can go all the way up to several hundred percent.
Yes, you read that right. The problem is, payday loans are one version of short-term loans, and they come with the highest interest rates in the business. This map from the Center for Responsible Lending highlights just how high payday loan interest rates can really get.
Con #2: Harder to validate as legitimate
Besides the high rates, it can be difficult to validate the lender you’re working with as legitimate. (this can also be true of other types of loans acquired online). It’s one thing to work with a bank you know, but another to find a lender for the first time online and have it be a company you might never have heard of. This makes it easier for scams to slip through, such as the notorious advanced-fee loan. In this scam, someone would be “guaranteed” approval if they pay fees for the loan upfront, only to do so and never have the funds from the loan come to fruition.
Con #3: Can be difficult to know who’s really getting your information
Finally, the last con is that it’s not always easy to know who you’re working with. Again, this can be a problem with other types of loans as well. For example, you might think you’re working directly with a lender only to find out that your credit application actually went through a broker and out to various lenders that you never vetted on your own.
Calculating the Costs of Short-Term Loans Online
One of the biggest risks of short-term loans (online or otherwise) is that they tend to come with higher interest rates than more traditional loans. If you have a choice between a traditional personal loan and a short-term loan, you might find significant cost savings in the former option.
To illustrate the cost issue, the Pew Charitable Trusts analyzed 296 loan contracts from 14 installment lenders and found the highest APR to be 367 percent and the lowest to be 16 percent. What’s more, that 367 percent was on a loan for only $129 — showing how quickly the convenience of a low-dollar, short-term loan can become a burden.
What’s more, Pew also highlighted the fact that the advertised APR isn’t the only cost of the loan. Front-loaded fees and add-ons like credit insurance can increase the total lifetime cost of a loan in ways that aren’t so easy to see unless you get all the information and do the math before signing on to the loan.
When you add up all these costs, you don’t just have more money leaving your pocket — you could be at risk of ending up in a cycle of getting new short-term loans to stay afloat. Although the goal of these loans is to get you out of a financial pinch, they can create a new one when their burden is too difficult to repay.
According to the Consumer Financial Protection Bureau (CFPB), “more than four out of five payday loans are re-borrowed within a month, usually right when a loan is due or shortly thereafter.” Although not all short-term loans are payday loans, this is a dire enough warning to be sure you can repay them in time without needing another loan.
Using the Online Nature of the Loans to Your Advantage
What does all this mean? It simply means that analyzing the costs — from interest to fees and add-on products you may or may not need — should be an important part of deciding if short-term loans online can work for you.
Although short-term loans online can help if you need funds fast and want to compare options from the convenience of your home, you could pay a premium for those loans. That said, most short-term loans have higher interest rates than more traditional personal loans — whether you obtain them online or in person. If high interest rates are a risk you’re willing to take, then doing so online at least makes it easy to compare options and shop for the best rates.
In short, it’s up to you to decide whether a short term loan online will help or hurt you, but the key to using one successfully starts with knowing what you’re getting into (and with whom).
And if anyone is saying you have to pay these fees before getting the loan (or they’re unwilling to disclose their fees), then it might be best to move on to the next lender. After all, that’s the beauty of any online financial product: You can do your research first on your own schedule and wait to act until you find the one that best meets your specific needs.