Choosing a Small Loan: Here Are Some Options


Are you considering getting a small loan? It’s a big decision. Consider the following before making your decision.

Many Americans are still worried about the economy. In fact, according to Harvard University’s Institute of Politics poll, a weak economy is the #1 concern for most millennials these days. This concern comes with a few good reasons, though; millennials are not the only ones. For example, central bankers are worried about how poorly the economic recovery is going because it is the slowest recovery since World War Two, and some experts have warned that some dark days are ahead.

Why? Central bankers seem to think that the U.S. is susceptible to another recession; some experts have suggested that a brand-new recession might already be underway, and some even speculate that the recovery may not be real. This is because job growth is still very poor; the labor force participation rate is at a record 38-year low, and the median income is still in decline. This is not just speculation, though.

Deroy Murdock of the National Review provides the following statistics:

  • During the Obama years, the number of Americans below the poverty line is up 3.5 percent.
  • Real median household income: down 2.3 percent.
  • Americans on Food Stamps — 33 million then, 46 million now: up 39.5 percent.
  • Americans who own homes: down 5.6 percent.

So when we consider rising prices (inflation) and higher taxes, this equates to a tighter budget for most. Tighter budgets usually mean fewer savings and fewer funds to handle emergencies. A computer or phone failure, car or house repairs, unplanned travel, surprise medical or dental expenses, or even a job loss can be devastating in an economy like this.

So what can you do when these situations happen? Some will rely upon their investments or pull from their savings. But what happens when you have more month at the end of your paycheck? Many will get a small loan to help them through a tough time. When they do, some will make smart financial decisions; some will fall down the rabbit hole. You need to understand that you have good and bad options. Consider the following before making your decisions.

Payday Loans

Payday Loans are small, short-term unsecured loans (usually $500 or less) lent at a very high-interest rate and on the agreement that you will pay off the loan once you get your next paycheck (usually two weeks or less). Usually, the borrower must provide a personal check that will be held for future deposits or grant the lender electronic access to your bank account so that they can take the funds when they become available.

For the most part, anyone with a checking account and a steady job can obtain a payday loan, but these loans come with a dark side. These loans come with hefty fees and high-interest rates. A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400%. There are usually a host of fees, especially if you are a little late repaying it.

Unfortunately, many people get caught in what is known as a “payday loan cycle,” which may go on for a long time and often leads to much bigger financial problems. Extreme caution is urged if you choose this service. Step back for a moment when you are short on cash and consider that a $15 or $25 late fee on your bill is often much less expensive than the finance charge on a payday loan.

Title Loans

Title Loans are small short-term loans secured by a vehicle you usually own free and clear. These loans are sometimes slightly larger than payday loans, lending up to the percentage of the vehicle’s value and termed at about a month (or sometimes longer). Of course, that is a best-case scenario.

If you get in the hole with these types of loans, it can become extremely difficult to get out; the result can be you handing your vehicle over to the lender. The caution is that similar to a payday loan, when expressed as an annual percentage rate, the interest rate often ranges from 300-365%. These are sometimes “dressed up” to reflect the rates as “monthly,” but make no mistake, a monthly rate of 25% is equivalent to a 300% APR.

Furthermore, sometimes there are minimums. Meaning: while you may only need to borrow $100, they may require you to take $500. Then there are the additional fees. These might include a processing fee, a document fee, an origination fee, lien fees, and of course, any late fees you may get along the way. It can add up very fast.

A simple internet search will highlight horror stories of people paying double and sometimes triple the amount they originally borrowed. In contrast, many people consider credit cards an expensive way to borrow money. Horror stories abound about the credit card, and chances are that you or someone you know has had to deal with the aftermath of allowing a credit card to get out of control. So to put this into perspective, high-interest rates for credit cards often top out at only 25% APR.

Signature Loans/Personal Loans

Arguably your best bet for a small to medium-sized loan would be the “Signature Loan,” sometimes referred to as a “personal loan.” This type of loan is generally an unsecured term loan. For some, a simple signature is all it takes. For others, a secured option may be required. This is where the collateral is provided or for a co-signer to sign a promissory note (a note of guarantee).

These types of loans are available at most banks and some online lending institutions. Interest can sometimes reach as high as 35% APR but is often much lower. To give you an idea of where the signature loan ranks, sometimes personal loans are used to pay the balance on a credit card that has a higher rate. Still, even at 35% percent (which is really high for such a loan), with fewer fees and better terms, a signature loan is still far better than the previous alternatives. The good news is that even in the Signature Loan world, there are plenty of options.

Some might argue that a better option than getting a signature loan from a bank would be to get a signature loan from a Credit Union. Credit Unions are notorious for having cheaper rates than banks and are often willing to work with those who could use a little help. Interestingly, many credit unions have programs specifically designed to build or repair credit. They are all about competitive fixed interest rates, affordable payments, and no prepayment penalties. In fact, some credit unions will even offer a discount on your interest rate when you set up your checking and savings through them. And you win there again because these accounts are usually more cost-effective than what banks can offer.

Do some research and discover what is right for you before getting a small loan. Be careful of the traps and find yourself a lending institution that you can develop a relationship with, one that can help you build wealth and secure some savings so that you can be prepared for the next emergency. In the end, that’s what it’s all about.

Keep learning! Check out my article titled, “Strategize Your Debt With a Plan.

See Financial/Legal/Tax Disclaimer.