Why to be wary of guaranteed loans, plus 8 safer alternatives

While no loans come with guaranteed approval, a guaranteed loan can refer to a storefront payday loan or other no-credit-check loan. These loans are easy to get with bad credit, but they’re often costly (triple-digit APRs), difficult to discard (short repayment terms) and risky (collateral could be seized). In fact, most payday loan borrowers spend more money on fees than they originally borrowed, according to past Pew Charitable Trusts research.

Thankfully, there are safer alternatives to guaranteed loans for bad credit borrowers, including Payday Alternative Loans, cosigned and secured personal loans as well as paycheck advance apps and overdraft protection.

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What ‘guaranteed loans’ are we talking about?

Generally speaking, the term “guaranteed loan” may refer to a number of financial products, including:

• Guaranteed mortgage
• Guaranteed federal student loan
• Personal loan guaranteed by a cosigner
• No-credit-check business loan

We’re focusing on no-credit-check loans for personal use, which have few eligibility requirements and are easy to obtain with bad credit.

Types of guaranteed loans

We’ll cover several types of guaranteed loans, but note that they all have one thing in common: They come with high interest rates because they don’t require a credit check. (Because lenders don’t have a view into your credit history, they charge higher rates to account for their perceived risk.)

Type	How it works	What to be wary of
Installment loan	An installment loan offers a sum of money upfront in exchange for equal monthly payments with interest over time.	Online installment loans for bad credit borrowers often come with triple-digit interest rates.
Payday loan	A payday loan is a small-dollar, high-interest, short-term loan. While the due date typically corresponds with your next paycheck, most payday loans get renewed, resulting in more fees.	The average annual percentage rate (APR) for a payday loan is almost 400%. In most cases, payday lenders can withdraw money directly from your bank account, which may result in overdraft fees.
Pawnshop loan	Pawnbrokers offer small loans in exchange for holding on to a valuable item (say, jewelry or electronics) that belongs to the borrower. If the borrower fails to repay according to the loan terms, the pawnbroker can sell the item.	APRs may be as high as 240% in some states, and repayment is often due in just one or two months. If you can’t come up with the cash in time, you may lose your valuable property, unless the lender allows renewals.
Title loan	An auto title loan is a small-dollar loan that requires you to provide your car title as collateral. These high-interest loans are typically due within 30 days.	With APRs around 300%, many borrowers have difficulty with on-time repayment, and one in five title loan borrowers have their vehicles repossessed by the lender, according to the Consumer Financial Protection Bureau (CFPB).

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Be wary of guaranteed loan risks

“The main risk is getting into debt far over your head because of interest rates,” said Kyle Enright, president of online lender Achieve, referring to payday loan APRs of nearly 400%.

High fees combined with short terms mean that many borrowers struggle to repay the loan on time. Most lenders offer borrowers the chance to renew the loan for an additional fee — about 80% of payday loans are rolled over within two weeks. The mounting fees mean some borrowers can’t escape the cycle of debt. The typical payday loan borrower spends five months of the year in debt, paying $520 in fees on average, according to Pew research.

Collateralized loans come with the additional risk of losing valuable property. For example, about 20% of title loan borrowers lose their vehicles to repossession, according to the CFPB. If you rely on your car to get to work, defaulting on a title loan can have dire consequences for your financial security.

Pawnshop loans can also result in the loss of precious valuables. And since pawnbrokers may not lend you more than 60% of an item’s resale value, failing to repay this type of guaranteed loan results in a worse deal than selling the item for cash.

8 alternatives to consider before guaranteed loans

1. Payday Alternative Loans (PALs)

Many credit unions offer Payday Alternative Loans, which are small-dollar loans with terms of up to 12 months. Interest rates are capped at 28%. Credit union membership is required, but it’s free and easy to apply, and you can be immediately eligible to borrow if the credit union offers PAL II loans.

However, not all credit unions offer PALs, so confirm this loan’s availability before becoming a member. To find a credit union near you that offers PALs, use the National Credit Union Administration’s locator tool and filter by Payday Alternative Loans under “Additional Search Options.” (Your credit union may have its own name for this type of loan.)

Best for: Credit union members

2. Cosigned personal loans

If you have a friend or family member with good credit who can cosign a personal loan, you’ll improve your chances of approval. Just keep in mind that your cosigner will be responsible for the loan if you fail to repay, and missing a payment could hurt their credit scores.

Best for: Borrowers with family support

3. Secured personal loans

Lenders are more likely to approve secured personal loan applications because they can retrieve value in the event of nonpayment. If you have something to offer as collateral, such as your vehicle or a savings account, you may get a lower rate with a secured personal loan. However, you’ll risk losing your property if you fail to repay the loan.

Best for: Vehicle owners who are sure they can repay the loan

4. Cash advance apps

Some money apps allow you to receive a portion of your paycheck ahead of payday without a credit check. Typically, repayment is automatically taken out of your next paycheck. These apps come with different fee structures but often cost less than payday loans. For example, Earnin makes money from tips, which are entirely optional. Some lenders charge an express funding fee if you want to get your money quickly.

Best for: Workers who receive direct deposit

5. Buy now, pay later

If you need to pay for an item online and you don’t have enough cash, you can typically pay in four installments over six weeks without interest if the retailer works with a buy now, pay later (BNPL) provider. For example, Klarna allows you to pay in four biweekly payments with no interest and only requires a soft credit check. However, long-term financing options from lenders like Klarna require you to pay interest. And if you miss a payment, you’ll be charged a fee.

Best for: Online shopping

6. Bank overdraft protection

Overdraft protection, for a small fee, allows you to make a debit or clear a check without the necessary funds in your account if you’re experiencing a temporary cash-flow problem. “It’s not ideal, but the cost typically is much lower than a payday loan,” said Enright. Overdraft fees typically cost around $35 per transaction.

Best for: Banking customers making a one-time overdraft

7. Friends and family loans

If you need a few hundred dollars to tide you over until payday, borrowing from a friend or family member is much safer than taking out a payday loan. Your loved one may give you flexibility with repayment and charge you low or no interest. Just make sure you have a plan for repayment (and stick to it), or you could risk harming the relationship.

Best for: Borrowers with family support

8. Improving your credit

Good first steps include making debt payments on time and keeping your revolving balances low relative to your credit limit. If you have very poor credit or no credit history, you may consider becoming an authorized user on a family member’s credit card.

Building good credit typically takes time, but helpful tools may boost your credit immediately. For example, Experian Boost gives you credit for your on-time utility and rent payments (the credit bureau claims consumers see an average credit score increase of 13 points).

Once your credit scores surpass 600, you’ll have access to more personal loan options, and some bad credit personal loans may be available to borrowers with even lower credit scores.

Best for: Responsible renters and people with patience

How to find a guaranteed loan (if you must)

Guaranteed loans should only be used as a last resort to cover a necessary expense. If you have no other options, you should take the following steps to ensure you get the best (and safest) possible guaranteed loan:

• Compare rates and terms online. Rather than heading directly to a payday loan storefront, research online installment lenders, which tend to provide lower rates and longer terms to poor credit borrowers. For example, lenders like 60MonthLoans offer APRs below 36% in many states and a three-year repayment term.
• Research lender reputations. Check that the lender is licensed in your state and read customer reviews on third-party websites to ensure the lender has a good reputation. Also, test-drive its customer support before borrowing by calling to ask questions.
• Avoid scams. Although we’re using the term “guaranteed loans” to refer to no-credit-check loans, no lender should guarantee approval before you apply. If they do, it’s a scam. It’s also illegal for lenders to ask for upfront fees.