Text loans are a convenient modern twist on the already risky payday loan. Although it’s an easy substitute for those with no credit or with troubled credit history, it comes with substantial risk. The ease of use can quickly lead to complacency with spending habits, and poor handling of outstanding credit. Well-qualified borrowers should look elsewhere for credit, and less qualified borrowers should ensure they have no other options and be certain they can meet the terms of the loan to avoid being trapped by paralyzing interest payments.
An Introduction to Text Loans
Text loans are short-term, high-interest loans that are similar to payday loans. Where they differ from payday loans is how they are issued. Borrowers can take out text loans through their mobile phones simply by texting lenders. This makes credit more accessible than ever. Although quick and easy credit is very beneficial for those dealing with sudden and unexpected expenses, these have the potential to wreak havoc on a borrower’s already strained finances, just like payday loans.
How Do Text Loans Work?
A text loan allows a potential borrower to send a text message with a personal identification number to a credit issuing institution and have them deposit money into a pre-arranged bank account, often within minutes. The PIN is issued after an initial application process in which the lender confirms the particulars of the borrower (or debtor). Some lenders do not require a credit check, which makes text loans even more convenient for those with a troubled credit history. Typically, the principal is $100 but can be as high as $1000. The convenience associated with these loans comes at a very steep price. The representative Annual Percentage Rate (APR), which includes all fees and costs in addition to the interest rate, can be as high as 994% for text loans.
Advantages and Disadvantages of Text Loans
How Can Text Loans Be Useful?
Sudden and unexpected expenses affect everyone, but not everyone has the financial capability to reconcile those expenses on a short-term basis. Those with very constrained budgets and limited credit availability often turn to short-term lenders in the form of payday loans to satisfy sudden and unexpected expenses. These high interest loans can be very convenient for borrowers who have the capability to pay back the principal plus associated fees and interest within the term outlined in the loan agreement and, for those well-qualified debtors, a text loan simplifies that process.
How Can Text Loans Be Dangerous?
The high interest rates associated with short term loans and especially with text loans can be managed with appropriate budgeting. However, those who take the loan without the ability to repay in the allotted time can face dire financial consequences. The interest begins to compound, and additional late and administrative fees are applied on top of the interest payments. The creditor often has access to the borrower’s bank account, which means any money in the account can be taken, and if there are insufficient funds, daily attempts by the lender to access bounced funds can lead to administrative fees applied by the bank.
As credit becomes more easily available those who use high interest short term loans like text loans risk becoming complacent about monitoring and paying their outstanding credit. It is important to note that although the method for taking out a loan has relaxed, the gravity of not paying, or paying late, has not. On the contrary, compared to traditional loans the terms of text loans are more restrictive and the consequences for not paying are more severe.
Alternatives to Text Loans
Credit unions and other credit issuing institutions are often capable of issuing short-term loans for a more reasonable interest rate for those with a positive credit rating. Banking overdraft, which is the ability for an account holder to withdraw more than the account balance, is also a viable option . Finally, credit cards are often the most effective way, if used responsibly, to acquire credit in the short term. However, only an analysis of an individual’s personal finances can determine the best method of borrowing.