What is a Spot Loan?

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  • Spot loans are a type of installment loan that can be accessed quickly to cover sudden personal expenses.
  • Although spot loans are more accessible than some other lending options, they often come with short repayment periods, high interest rates and other steep fees.
  • Borrowers looking for a short-term loan might also consider a secured personal loan, co-signed unsecured personal loan or similar financing option.

Spot loans are designed to provide speedy financing to borrowers facing an unexpected expense — but that fast cash often comes at a high price. If you're considering a spot loan, be sure to understand the pros and cons before pulling the trigger.

What is a spot loan and how does it work?

Spot loans are a type of installment loan intended to cover sudden personal or commercial expenses. They're often offered by online lenders and issued immediately upon application, giving you access to your funds within a few hours of approval. Spot loans generally require little or no collateral to back the loan. There may not be strict credit score requirements, which makes them appealing to borrowers with low credit scores.

However, in exchange for this increased accessibility, spot loans have some notable drawbacks. First, spot loans typically have a shorter repayment period than other personal loans — generally two years or much less. This may result in a higher monthly payment than you would find with other types of financing. Second, spot loans often charge high interest rates and other steep fees.

A spot loan may be right for borrowers who are in immediate need of funds or whose credit scores would prevent them from qualifying for other types of loans. However, before considering a spot loan, borrowers need to be sure that they can keep up with the high monthly payments, interest rates and other fees.

Pros of spot loans

  • Issued quickly. Most spot loans are available online or by phone. Once the lender has reviewed your application, you can be approved very quickly. This speedy process makes spot loans a fast, convenient source of cash in a financial emergency.
  • No collateral necessary. Spot loans are usually unsecured. In other words, they don't require collateral, which is a valuable asset (such as your savings account, investments or automobile) that backs up your debt in case you miss the payments. This means you're not at risk of losing personal property if you can't repay your loan.
  • Often available to borrowers with lower credit scores. The lower your credit scores, the less likely you are to qualify for credit. If you're unable to secure other types of loans, credit cards and lines of credit, spot loans typically have looser credit score requirements.

Cons of spot loans

  • High interest rates. Because spot loans are unsecured, they're often accompanied by very high interest rates. As a result, spot loans are usually much more expensive and can overwhelm many borrowers with unmanageable debt.
  • Short repayment periods. Spot loans have brief and rigid repayment terms, often lasting only a few months. This fast-tracked repayment schedule may be challenging for some borrowers, especially if you're already struggling financially.
  • Predatory lending practices. Spot loans are frequently offered to borrowers with low credit scores — in other words, the debtholders are generally most likely to default and miss their payments. Excessive interest rates, higher monthly payments than other types of borrowing and targeting borrowers with low income and bad credit make spot loans subject to potential predatory lending. Predatory lending practices benefit the lender at the borrower's expense and may include fraudulent, deceptive or unfair practices that can be harmful to borrowers.

Alternatives to spot loans

If a spot loan doesn't sound like the best choice for your finances, you're in luck: There are other short-term financing options available.

  • Consider a co-signed unsecured personal loan. Unsecured personal loans are small to moderately sized installment loans that don't require collateral and can be used to cover a wide range of expenses. However, if you have low credit scores, limited income or too much debt, lenders may be hesitant to offer you a personal loan. That's where a co-signer can step in.

    Co-signers agree to be legally responsible for your debt if you default or miss a payment. Having a co-signer with high credit scores and a favorable credit history can help reduce the risk that a lender will lose money in the event of missing the loan payments. As a result, lenders may be more likely to approve your personal loan application when it's backed by a co-signer.
  • Take out a secured personal loan. Some lenders also offer secured personal loans, which do require collateral. Because they are backed by an asset and generally carry less risk for the lender, they may have lower credit score requirements and more lenient repayment terms than unsecured personal loans.
  • Become an authorized user on someone else's credit card account. Credit card interest rates are generally higher than other forms of credit; however, they're still often lower than the interest rates on spot loans. If you can't get approved for a credit card on your own, you might ask a family member or close friend to add you to their account as an authorized user.

    An authorized user can make purchases as if the credit card were their own. However, the responsibility to pay off the debt ultimately lies with the primary cardholder. Becoming an authorized user can give you access to much-needed credit. Just make sure to keep up with any charges you make to avoid damaging the primary cardholder's credit scores — or your relationship with the primary cardholder.

Spot loans can be tools to access financing on short notice. However, their quick repayment periods and high fees can make them a risky option for many borrowers. As with any loan, carefully consider the financial consequences of taking on new debt before submitting your application.

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