Financial advisors break down 4 dangerous loans to avoid when you need money fast (2024)

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  • Payday loans and title loans come with high interest rates that trap many people in a cycle of debt.
  • Receiving money from your family isn't always a bad idea, but they can harm your relationship.
  • Depending on your credit, there are usually far better options available to meet your needs.
  • See if you're prequalified for a loan without impacting your credit score.

Financial advisors break down 4 dangerous loans to avoid when you need money fast (1)


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If you need money fast, there are so many loan options out there. A few months ago, my husband and I had to take out a small personal loan to cover some expenses while we waited to sell our house.

Due to our credit, we were approved quickly and received pretty favorable terms. As soon as our home sold, we paid the loan off. It's important to realize that not all loan options are created equal.

"When you need to borrow money, you should avoid loans with a high interest rate, an extra short repayment term, or a clause that puts an important asset at risk," says Leslie Tayne, a financial expert and head attorney at Tayne Law Group.


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Some loans will cost more money and inconvenience than they're worth. I spoke with a few financial advisors to get their take on the top four loan types you should avoid and some alternatives to consider.

See Insider's picks for the best personal loans »

1. Payday loans

Payday loans are the worst type of loan to get, because they offer very high interest rates and short repayment terms. Maximum loan limits are also a lot smaller at around $500 or less.

Generally, payday loans are due by your next payday and aside from added fees, interest rates can be as high as 400%.

"Many people end up trapped in a cycle of debt as a result of taking out a payday loan," says Lucas Noble, a Certified Financial Planner at Noble Financial Group.

Noble explains that most people take out payday loans in an attempt to cover immediate expenses, but when the time rolls around to repay the loan, they must come up with much more money than they borrowed.

The overall structure of payday loans makes it hard for people to get back on their feet financially and avoid needing another loan to pay off the last one.

2. Title loans

Title loans are another high-interest loan to avoid due to its high fees and requirement of using your own car for collateral.

"Like payday loans, these loans are short-term and have a very high APR, but in addition, you risk losing your car if you are unable to pay it back since this is a secured loan," says Kendall Meade, CFP at SoFi.

Several lenders offer title loans, and the fees can be as much as 25%. This means if you borrow $1,000, for example, you'll owe $1,250 total at the end of your 30-day term.

According to the Consumer Financial Protection Bureau, 83% of people who took out a title loan in 2019 still owed money on the loan at least six months later. So even though these loans are intended to be extremely short-term, the fees create another cycle of debt that may continue to drain borrowers of even more money.

See Insider's picks for the best debt consolidation loans »

3. Cash advances

Some credit cards offer a cash advance where you can borrow against your credit limit and get cash from the ATM. While this option is convenient and you don't need to apply for a new loan, it's also more costly since you'll be charged more interest than your current rate for credit card transactions.

"Cash advance interest rates can be as high as 36%, not including the upfront fee," says Meade. "You'll start paying that high interest rate from day one until you pay off the balance."

4. Family loans

If you have friends and family who can loan you money for an unexpected expense, this may seem like a good option. Just be sure to establish clear loan terms if you are in fact receiving a loan and not a gift.

If the loan amount exceeds $10,000, the IRS requires a written agreement detailing the loan terms, repayment schedule, any interest that's being charged, and so on. For the person loaning you money, if the total amount exceeds $10,000, you must also report any income earned from interest payments on your taxes.

Unfortunately, these types of loans can also strain relationships with your loved one if something comes up that delays your repayment of the loan. Almost half of all family loans never get repaid, and this risk can place a wedge between family members over financial issues.

See Insider's picks for the best personal loans for bad credit »

Better loan alternatives

While some loans just don't seem worth the hassle, there are still plenty of lending options to help out during emergencies especially if you have a good or average credit score.

  • Low interest personal loans. Personal loans typically have lower interest rates and longer repayment terms than payday loans. You can also compare loan options and terms online before applying. See if you're prequalified for a loan without impacting your credit score.
  • 0% APR credit cards. If you have great credit, you may be able to qualify for a credit card with a temporary 0% APR offer. This allows you to avoid high interest and fees for some time. You'll want to make sure you can pay off the balance before the 0% APR period ends.
  • Home equity loans. If you have equity in your home, you can borrow against some of that amount with a home equity loan. These loans typically have a fixed interest rate and fixed payment, but your home is also used a collateral.
  • HELOC. A home equity line of credit is another type of home equity loan and it allows you to borrow from a revolving line of credit similar to a credit card. These loans are helpful for home repairs or remodeling where you may need to borrow money as needed.
  • 401(k) loans. 401(k) loans allow you to borrow money from your 401(k) retirement balance and pay it back through your paycheck deductions. This option usually has a lower interest rate, and you're limited to 50% of your vested account balance or $50,000, whichever is less.
Choncé Maddox

Choncé Maddox is a freelance personal finance writer who enjoys writingabout credit, loans, saving, and helping people achieve financialwellness. Her work has been featured on LendingTree, Forbes Advisor, andThe New York Post. She earned a Bachelor's degree in Journalism andCommunications from Northern Illinois University and resides with herfamily in the Nashville area.

Financial advisors break down 4 dangerous loans to avoid when you need money fast (2024)


Financial advisors break down 4 dangerous loans to avoid when you need money fast? ›

Hardship personal loans are a type of personal loan that is designed to help you overcome financial difficulties. This type of loan is generally offered by small banks and credit unions, and has lower interest rates, lower maximum loan amounts, and shorter repayment periods than standard personal loans.

What is a hardship loan in finance? ›

Hardship personal loans are a type of personal loan that is designed to help you overcome financial difficulties. This type of loan is generally offered by small banks and credit unions, and has lower interest rates, lower maximum loan amounts, and shorter repayment periods than standard personal loans.

What is a predatory financial service? ›

Lending and mortgage origination practices become "predatory" when the borrower is led into a transaction that is not what they expected. Predatory lending practices may involve lenders, mortgage brokers, real estate brokers, attorneys, and home improvement contractors.

What is the danger of payday loans? ›

Payday Loans Are Financial Quicksand – Many borrowers are unable to repay the loan in the typical two-week repayment period. When it is due, they must borrow or pay another round in fees, sinking them deeper and deeper into debt.

Why are payday loans offered by check cashing establishments risky for long-term cash needs? ›

Payday loans have high service fees and a short repayment period. For example, a customer who borrows $100 for two weeks and is charged $15 (the maximum for this loan amount), will pay a service fee equal to a triple-digit annual percentage rate (APR).

Are hardship loans worth it? ›

But, if you need a short-term infusion of a small amount of cash, a hardship loan may be a solution. However, hardship loans can be expensive if you have poor credit. A low credit score and poor payment history can make it difficult to qualify for a hardship loan.

Is the national financial hardship loan real? ›

The email claims to be from a government agency or organization that offers financial assistance to those in need. The email says you have been approved for financial support and to call a phone number to finish enrolling in the program. However, it is all fake.

What is the red flag for predatory lending? ›

Look for high or hidden fees.

High interest rates and other fees are common tactics used to take advantage of borrowers. Be sure to read through the terms and conditions and look for sections that list the fees, penalties, and payment details.

What are the most common predatory loans? ›

Payday loans are one of the most common examples of predatory lending because they have high fees and short repayment terms.

What are signs of predatory lending? ›

8 Signs of Predatory Mortgage Lending
  • Sign 1 - Big Fees. ...
  • Sign 2 - Penalties For Paying Off Early. ...
  • Sign 3 - Inflated Interest Rates From Brokers. ...
  • Sign 4 - Steering And Targeting. ...
  • Sign 5 - Adjustable Interest Rates That "Explode" ...
  • Sign 6 - Promises To Fix Problems With Future Refinances.

What are the 5 C's of credit? ›

Called the five Cs of credit, they include capacity, capital, conditions, character, and collateral. There is no regulatory standard that requires the use of the five Cs of credit, but the majority of lenders review most of this information prior to allowing a borrower to take on debt.

Are predatory loans illegal? ›

Protect Yourself from Lending Abuse. Abusive or "predatory" lenders target people who are strapped for cash. But the loans they push usually have sky-high interest rates and fees. They're often illegal, too.

How do you fight a predatory loan? ›

Protect Yourself From Manipulative Lenders

If you want to file a formal complaint with the CFPB, you can: Call 1-855-411-2372. Submit a complaint online at

What's the easiest loan to get approved for? ›

What is the easiest loan to get approved for? The easiest types of loans to get approved for don't require a credit check and include payday loans, car title loans and pawnshop loans — but they're also highly predatory due to outrageously high interest rates and fees.

Is check cashing predatory? ›

Critics of check-cashing companies posit that they are predatory, and their fees are significantly higher than they would be if a customer were using a traditional bank, thus making households who rely on their services worse off than if they just had a checking account and could cash checks for free.

Why do people use check cashing instead of banks? ›

Banks are notorious for holding funds, and it can be incredibly frustrating. However, check cashing places make it easy to get your cash right away. In fact, one of the biggest benefits of going to a check cashing place versus a bank is that you know you'll walk out with cold, hard cash.

Does a hardship loan affect your credit? ›

The act itself of signing up for a hardship plan has no effect on your credit. However, once you enroll, your credit scores could be indirectly affected because of the way the program works. First, your credit card issuer may put a note on your credit reports regarding your participation in its hardship plan.

What is considered hardship? ›

For a distribution from a 401(k) plan to be on account of hardship, it must be made on account of an immediate and heavy financial need of the employee and the amount must be necessary to satisfy the financial need. The need of the employee includes the need of the employee's spouse or dependent. (

How long does a hardship loan take to process? ›

You'll receive an email notification to let you know if you're approved. If approved, you'll also receive a final notice when your funds are on the way. Please expect about 7-10 business days to receive checks through USPS mail.

What is a hardship letter for a loan? ›

A financial hardship letter is a correspondence you send to a creditor that explains why your current financial situation prevents you from making debt payments. After providing details about your hardship, such as the cause and timeline, request that the creditor provide a mutually beneficial solution.


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