If there’s an offer that appears too good to be true… it’s probably because it is too good to be true.
Nothing in life is free, and this is especially true if you’re ever in a bind and need some cash fast. Yes, there are options like borrowing from your 401K or taking out a home equity loan, but if that isn’t an option, consumers often turn to alternative sources. These might include “debt traps” such as payday loans. Payday loans are typically not recommended because consumers usually only receive a relatively small amount of money in exchange for extremely high interest rates, and the promise that they’ll repay the loan when they receive their next paycheck.
Like we said, it’s not a recommended “get money now” tactic, but it’s there if you’re ever in a bind and don’t have anywhere else to turn.
This all brings us to another “debt trap” type of loan that’s gaining some traction these days: online installment loans. Commonly referred to as “long-term payday loans,” these loans can be difficult to recover from. In this post, we’ll take a look at why online installment loans should be even more of a last resort than payday loans.
Online Installment Loans Explained
So just what are online installment loans? They work similar to mortgage or auto loans, in that consumers pay off a set amount over an agreed-upon time span. However, where installment loans differ is that they’re often specifically targeted to consumers that have poor credit or no credit at all.
In other words, these are loans with super high fees and super high interest rates, which means you’ll be paying big time, even if the installment is just for a few months. Because of the high fees and high interest, it can be a tough debt cycle for consumers to break out of — and this alone can result in more trouble than they were in to begin with, financially speaking.
Think of online installment loans as a combination of a payday loan and a typical installment loan. They deliver money fast, yet with high interest rates and fees. However, they’re paid off in several installments over time, something that can give consumers the illusion that they have more control over their finances and debt. Yet, similar to payday loans, consumers often “recycle” the loan, or can’t afford to make their agreed-upon installment payments due to the ridiculously high interest rates. In some cases, online installment loans can end up costing consumers 100 percent in interest over the course of the loan.
Furthermore, online installment loan lenders either require or strongly push consumers into arranging automatic payments, something that can complicate the matter even more. Automatic payments are great for lenders, as they can sleep soundly knowing that they received their money. But they’re not always great for consumers, especially those who have fallen on hard times and need to take out an online installment loan. Automatic payments can result in depleted or overdrawn checking accounts, which can cost consumers money in overdraft fees and result in having to take out another payday or online installment loan when their cashflow is eliminated or depleted. It’s a dangerous financial cycle to get into.
What Can You Do?
The reality of these situations is that such loans are unfortunately a necessity for many American households. In fact, data suggests that up to 12 million American households use payday loans on an annual basis, yet about 25 percent of those taken are recycled (i.e., re-borrowed) as many as nine times more. What’s more is that it’s estimated borrowers spend about five months on average paying back loans, which translates to more than $500 in fees. Online installment loans aren’t any more favorable.
So, what can you do? Generally speaking, we advise you to never take out a loan where the interest rate is at or more than 36 percent. And while financial emergencies happen and can make doing so inevitable, there are some ways to prevent this from happening. For instance, you can make your New Year’s Resolution to establish an emergency fund, or improve your credit so that your borrowing options are better than payday loans. Ultimately, it’s important simply to be aware of what loans actually are and how much they have the potential to cost you.