An instant loan can get you cash quickly— sometimes within the same day — even if you don’t have strong credit. Getting fast cash for unforeseen costs such as a car repair or medical bill can feel like a solution. However, instant loans put you on a slippery slope of repayment that you may not be able to sustain financially.

The adverse effects of instant loans are even more detrimental for low-income borrowers. According to California’s Department of Financial Protection & Innovation, nearly half (42 percent) of payday loan borrowers had an income of $30,000 or less in 2020. Twenty-four percent of payday loan borrowers earned $20,000 or less.

Instant loan products, which typically charge sky-high interest rates and fees, exacerbate the finances of borrowers who are already struggling to stay afloat. If you are considering an instant loan, think about what it will mean for you financially and weigh every option before signing on to the terms.

What is an instant loan?

An instant loan is a short-term loan that’s typically for a small amount of money and comes with high interest rates and fees. Instant loans are available in a few varieties:

  • Payday loans. Also called a cash advance, a payday loan doesn’t require collateral and offers you cash on the same day. You’re required to repay the loan — plus high interest fees — by your next pay period.
  • Pawn shop loans. A pawn shop loan, or pawn loan, is a secured loan. The pawn shop holds an item you own as collateral for the loan. In exchange for the item, you receive a loan in a lesser amount than the collateral’s value. If you don’t return to repay the loan by the payment date, the pawn shop will claim ownership of the item.
  • Car title loan. Also known as a pink slip loan, this loan is secured by your vehicle’s title. You still get to drive your car, but you’ll need to repay the loan in full, including interest fees, by the due date. If you don’t repay it on time, the lender can take ownership of your car.

Regardless of which type of instant loan you’re considering or what a lender calls it, an instant loan is a high-risk borrowing option.

How do instant loans work?

Payday loans are a common instant loan option, with 12 million U.S. adults using them yearly. Instant loan amounts are usually around $500 or less. Interest on the loans is incredibly high, sometimes shown as a percentage or dollar amount for every $100 borrowed. For example, a 15 percent fee for every $100. Fees vary by state, and each state has its own fee limits.

  1. Submit an instant loan application. Payday loans don’t typically require a credit check. However, you’ll need to provide your personal information, be at least 18 years old with a valid ID, show proof of income (e.g., a pay stub) and have a bank account. You can find a lender online or in person at a local cash advance location, depending on where you live.
  2. Give a postdated check or ACH authorization. You’ll need to write the lender a postdated check marked with the loan’s due date. The check amount will include the borrowed amount, plus interest. If you go through the instant loan process online, a lender might require an ACH (Automated Clearing House) authorization for your bank account.
  3. Receive your loan funds. The lender will provide the loan amount (excluding fees) as a lump sum in cash. For an online instant loan, this might be directly deposited into your account if you’ve given them access.
  4. Repay the loan by the due date. The repayment term for a payday loan is about two weeks, or when you receive your next paycheck. This also varies by lender, depending on the details of the loan agreement. When it’s time to repay the loan, you’ll pay the loan amount and fees and get your postdated check back.

If you can’t repay the loan on time, some payday lenders offer a rollover to delay repayment for another pay period. Not all states allow rollovers, and this option costs another fee.

Are instant loans a good idea?

In most situations, instant loans aren’t a good idea and should be avoided if possible. Here’s a closer look at the drawbacks of this convenient funding solution: 

  • Steep borrowing costs. According to the St. Louis Federal Reserve, the average payday loan interest rate is 391 percent for the first two weeks. So, if you need to borrow $400, you’ll pay an extra fee of $60 to get the funds you need today. This fee may seem nominal, but borrowing costs can add up rather quickly if you’re unable to repay what’s owed on the due date. 
  • Overdraft fees. Lenders generally require access to your bank account to initiate repayment when the loan becomes payable. If you fail to request a rollover, extension or if neither of these options are offered in your states, you’ll likely incur penalties from your financial institution until your balance is sufficient enough to cover the amount owed. 
  • Short repayment periods. If you’re already facing financial hardship, it may be challenging to repay the loan plus any applicable interest and fees within such a short timeframe. In fact, four out of five payday loan borrowers rollover or renew their loan within 14 days, according to the Consumer Financial Protection Bureau. Unfortunately, this option comes at a cost, and continuous rollovers or renewals could cause the fees to balloon. Using the example above, if the lender charges $60 per rollover and you extend the loan twice, the balance will increase to $520 in just one month.
  • Potential credit damage. If your loan goes into default, debt collectors can report it to credit bureaus and your credit will suffer. Collection accounts can tank your credit score and linger on your credit report for up to seven years. The debt collectors can also sue you to recoup the outstanding funds. If the court rules in their favor, your wages might get garnished.

What are alternatives to instant loans?

Before moving forward with an instant loan, consider if you’ve gone through all the alternatives below.

  • Negotiate a payment plan. Contact your creditor or servicer to explain your financial situation and see if they offer reduced payment plans.
  • Personal loan for bad credit. Although this option also comes with high interest rates, they’re still considerably lower than payday loan fees. According to debt.org, payday loans essentially have 300 to 500 percent interest rates when you factor in fees while a personal loan for someone with bad credit may have an APR of 25 to 30 percent, at the highest. Plus, most personal loans offer longer repayment periods.
  • Family and close friends. Ask trusted family members and close friends if they’re willing to give you a short-term loan. Make sure you’re both clear about interest and repayment expectations. Make a written agreement, if necessary.
  • Speak with a nonprofit credit counselor. For a long-term solution, discuss your debt options with a nonprofit credit counseling agency, such as the National Foundation for Credit Counseling. Their services are free or low-cost, and they can help you with a debt management plan so you can be prepared for unexpected expenses.

The best way to avoid using payday loans is to practice good financial habits. Make sure you have a budget in place that works for your income and expenses. Save ahead of time for big expenses that you know about, and try to set aside an emergency fund that you can use for unexpected large expenses. It’s a good idea to save an emergency fund that will cover your typical expenses for three months.

Next steps

Instant loans aren’t an ideal go-to when a big expense surprises you. If you can, consider the alternatives before taking on unnecessary fees through a payday loan.

If you believe an instant loan is really your only recourse, read your state’s regulations for payday lending. States impose maximum loan amounts, fee and rollover restrictions and other requirements on payday lenders to discourage predatory lending practices.

To learn more about the rules in your state, you can reach out to your state banking regulator or attorney general.