5 Reasons to Avoid Cash Advance Loans

Cash advance loans come in many different forms. Some are secured personal loans, such as car title loans, given through a traditional lending institution. Other cash advances are payday loans administered through high-risk lenders. Cash advances from alternative lenders should be avoided for a number of reasons. 

#1 High Interest Rates

Unsecured cash advances have some of the highest interest rates of any loans on the market. The rates are high because, on the whole, these loans also have very high default levels. Lenders need to assess high rates to make the business of high-risk advances profitable. Only by collecting very high rates from the individuals who do pay can a lender make up for funds lost through borrowers who do not repay the debts.

#2 Short Contract Timelines

One of the reasons the default levels are high on high-risk cash advances is short timelines. Often, these loans are not repaid on an installment schedule. Instead, the loans are repaid in one lump sum, which is due within a short period of time from the day the loan originates. Borrowers have few options to extend the loan if they cannot pay on that date. Financing charges begin immediately, and the loan quickly becomes far more expensive because of these charges. 

#3 Predatory Lending Scams

Not all cash advance lenders are loan predators. Traditional lenders, such as banks insured by the FDIC, still issue cash advance loans without any unethical lending practices. That said, there are plenty of cash advance lenders who do not apply an ethical lens to extending funds. They will issue loans they are fairly certain cannot be repaid on time, hoping the borrowers will have to continually take more debts and pay high interest rates simply in order to avoid default.

#4 Debt Cycles

In a scenario where a borrower takes a new loan to repay an existing debt, the borrower will quickly end up in a loan cycle. In a number of states, cash advance lenders are prohibited from issuing any additional debt until the first debt has been repaid. This is to help borrowers avoid a scenario where the eventual cost of a loan exceeds more than 100 percent of the original loan amount. If a borrower takes a $200 cash advance but then has to continue taking more advances to repay the debt, the interest and fees on the first loan can easily add up to $500 or more in just a few months.

#5 Alternatives

The bottom line reason to avoid a cash advance is simple: there are alternatives. If you need money to repay an existing debt, contact the existing lender to attempt to refinance or alter your loan schedule. If you need money for rent, talk to your landlord about options for a payment plan. When you run out of these alternatives, consider securing a personal loan against an asset instead of opting for the high-risk loan. Cash advance loans are rarely the only option, and the other choices will usually be far less costly.

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