Small-Dollar Personal Loans: Borrower Beware |

When money is tight and unexpected expenses arise, going to a traditional bank in pursuit of personal loans is not always an option. If a consumer only needs a small loan (less than $2,500), most banks and other lenders will not accommodate you.  Borrowers are then forced to resort to finance companies, micro lenders, and similar small-dollar personal loan providers. While these lenders have their place in the consumer loan market, it is easy to get caught up in seemingly easy personal loans that ultimately set consumers up for future financial instability.

For a consumer who only needs a few hundred dollars, or has less than stellar credit, a small-dollar loan provider is a viable option. That is, of course, provided the consumer understands the nature of small personal loans. These loans typically have a higher interest rate, due largely to their short term nature. Lenders do not have several thousands of dollars owed to them, with years to accumulate interest income. Instead, they must rely on higher interest rates to bring in revenues on smaller amounts in less time. For consumers, this means small personal loans cost considerably more than more traditional loans.

While the consumer loan industry, including those lenders that offer small dollar personal loans, is heavily regulated (with more regulation coming every day), much is still left to interpretation in terms of fees, interest rates, and loan terms. For example, some finance companies are now charging fees for initiating the loan. Penalties can be steep when it comes to late payments. The demarcation line between a delinquent loan and a defaulted loan is more narrow than in other loans, thus putting a borrower’s collateral at risk far sooner with small personal loans than a traditional bank loan for more money.

When seeking small personal loans, it may be tempting to focus only on qualifying and getting affordable payments. However, these points are equally as important.

What will the loan ultimately cost you? Include loan initiation fees, interest, and other costs in your total.

If collateral is required, what constitutes default of the loan and forfeiture of the collateral?

What are the loan terms? Are there penalties for late payments? If so, when is the payment considered late?