A Guide to Instant Loans

It sounds so appealing: an instant loan. As if the money you need will just magically appear in your bank account. But an instant loan is not as amazing as it sounds -- and this type of loan typically comes with sky-high interest and fees that could mean trouble for your financial future.

But maybe you need to take the dog to the vet, get your car fixed or buy a new suit for an important meeting -- and maybe you are considering an instant loan. In fact, you probably wouldn't be considering an instant loan if you weren't feeling a bit desperate.

So, before you start clicking or applying or signing anything, there are some things you should know about instant loans.

So-called instant loans go by many names: instant cash loans, instant personal loans, instant unsecured loans and instant payday loans. But for the most part, the loans known as instant loans are an online version of payday loans.

If you have ever taken out a traditional payday loan, you know the drill: you walk up to a storefront with a garish Payday Loans sign (often next to a pawn shop or liquor store), wait in line behind others who are trying to obtain or get extensions on payday loans, and finally present your documents to a clerk who might be in a surly mood from dealing with long lines of borrowers all day long. If everything checks out, you get your money -- for a very large fee. Instant loans online are the same way, except without the driving to the strip mall, waiting in line and dealing with the clerk part.

Typically, instant loans work like this: you apply online, providing information such as:

• Proof of age and citizenship
• Evidence that you have held a job for a certain length of time
• A working e-mail address
• And a checking account in good standing

The company will check out your application information, then approve or decline your application electronically. If approved, you can take out an amount up to the maximum amount you get approved for, then the money usually shows up in your account within one to two business days. (So, you see, "instant loans" aren't really instant after all.)

Many instant loan companies offer amounts from $100 up to about $1,500, though not everyone would get approved for that amount.

Usually, a payment on an instant loan is due at the time of your next payday after you take out the loan. There are many online lenders offering these types of loans, and most of them require you to at least pay the interest accrued (which can be pretty high) if you get an extension on paying back the loan. If you get an extension, you usually have the option of paying back some of the principal at that time, too. Or, you can pay back the loan in full, with interest.

Because you have supplied the lender with your checking account information at the beginning of the process, they typically take the amount you have arranged to repay (whether just interest or the full balance you owe) directly from your checking account. If this makes you nervous, you might want to reconsider getting an instant loan.

That's the big question -- and it's a question that's not clearly answered on the Web sites of many online instant loan companies. Of course, they have to tell you how much it will cost, but many companies do not make the information easy to find for people who are just shopping, and you often have to apply or talk to a "helpful customer service representative" to get the real scoop on how much an instant loan will cost you.

Can you imagine if these companies did advertise their fees in big, bold red type? It might say something like: "Borrow $100 for two weeks, and pay us only $25! That's an APR of just 650-something percent!" So, you can see why they don't advertise these rates, but tend to make them hard to find or tuck the information down at the very bottom of an FAQ.

The bottom line is this: while some states have regulated the payday loan industry, including instant loans online, many loan companies charge $18 to $30 for every $100 borrowed -- meaning that, if it's legal in your state, you could pay as much as $90 (or even more) for a $300 loan.

It is important to note that fees and interest vary from lender to lender, so if you are determined to get an instant loan, don't go by these examples, but instead make sure you are very clear on exactly how much the company you have applied with charges, and exactly what the terms and conditions of your loan will be.

So, if you're in desperate straits because you had a financial catastrophe and you just need to buy groceries to feed your family until your next payday, $25 might seem like a reasonable price to pay for being able to go load up your grocery cart and not feed your kids bread crusts and canned beans for a week.

However, for many people who are in the position of considering an instant loan, they are in a situation, or they have money habits, that will make it difficult for this to be a one-time fee of $25 (or whatever the fee is.) Some people fall into the trap of getting extension after extension, increasing the fees and interest that they pay. Then maybe they take out a second instant loan and, before they ever realize it, it's become a problem that spirals out of control. Then, imagine the loan company takes their money and that causes a check or two to bounce. The bank charges a couple of $30 overdraft fees and ... well, you get the picture. It can be a dangerous game.

In fact, many savvy financial experts advise people to avoid these high-interest loans at all costs.

There are a number of alternatives to instant loans. Which alternative will -- or won't -- work for you depends on your specific situation. But, here are some ideas:

If you are planning to take out a loan because you spent your grocery money on a car repair, roof leak or plumbing disaster, this might be one of the easiest problems to remedy without a loan. Consider swallowing your pride and going to a local food bank to get some provisions. (You could also attend a few free lunches or dinners put on by religious groups or charities in your area, or scrounge together your change and make do with lots of pasta for a week or so.)

You could ask a friend or family member for a loan. The tricky thing about this is that if you are a good candidate for a family loan (meaning that you're not a repeat offender -- you are generally okay with your money and just had a one-time disaster) then you are probably the type who would do okay not getting into terrible trouble with an instant loan. (But if you are generally good with your money, your mom or brother would probably much prefer to PayPal you some money for a few days than have you spend $30 to borrow $100 from an instant loan company.) If you do take a loan from a family member or friend, be scrupulous about setting terms ahead of time and following them to the letter.

You could sell some stuff on Craigslist. Just about everyone has something lying around that could be sold on Craigslist for some quick cash. Furniture is especially popular. Not that you should sell the living room sofa or anything, but if you have something you're not using, it could be a good solution.

You could use a credit card. If you have a credit card that you've conditioned yourself not to use for daily purchases, you might be overlooking this option. As long as you pay the balance in full at the end of the month (or, at worst, over a period of two or three months) your interest rate will likely end up being a lot lower than if you took an instant loan.

For the future, the best way to avoid a financial crisis is to set up an emergency fund. Many people get intimidated out of setting up any emergency fund because many financial gurus say you need six months of living expenses in an emergency fund or you're in huge trouble. Many people think, "Wow. I could never do that," so they just give up. But these are usually the very people who need an emergency fund the most.

According to this great article on how to set up an emergency fund, an MSN Money expert says that you only need $500 to start with. That sounds a lot more doable, doesn't it? If even $500 sounds daunting, the article outlines the steps that just about anyone can take to get to that amount.

Photo credit --

Flickr Creative Commons photo by taberandrew