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Last Updated 03.01.2023
Last Updated 03.01.2023

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The Pros and Cons of Small Personal Loans For Bad Credit

The Pros and Cons of Small Personal Loans For Bad Credit - photo 3


We’ve all heard of loans – those unsecured loans that we use to fund our everyday purchases. But did you know that there is a whole sub-sector of loans that are specifically designed for smaller purchases? We looked back at the data to find out everything you need to know about small loans, including popular options and the advantages and disadvantages of each type.

The History Of Small Loans

The history of small loans dates back to the 1700s, when the first small loans were offered to farmers in England as a way to help them tide over a cash-flow emergency. These types of loans were designed to be easier to pay back (i.e., smaller payments) compared to standard loans, which were more difficult to obtain (i.e., larger payments).

In the early 1800s, short-term loans were given the same treatment as long-term loans and were referred to as “short-crop loans.” These types of loans were offered to farmers as a way to help them pay for their crops during a period of low prices. In 1875, the Industrial Revolution made its way to rural England, resulting in an increase in demand for agricultural products and a corresponding increase in the number of short-crop loans. During this time, short-term loans were offered by numerous banks and building societies, with most offering loans from three months to a year.

Types Of Small Loans

Depending on your needs, you can select from a number of different types of small loans, including consumer loans, merchant cash advances, and leasing. For the purposes of this article, we will discuss consumer loans and merchant cash advances.

Consumer Loans

When you apply for a consumer loan, you will typically be asked to provide a credit card along with signed copies of ID. You will also need to prove your income and assets. Your personal details will then be verified against publicly available records, and you will receive a decision within a few days. The amount of the loan will be determined based on your income, assets, and current financial situation.

It is important to note that, although these loans are unsecured, they are still considered “high-risk” loans by banks and other financial institutions. This is because they have an open-end credit line, which means that the lender has the ability to raise the amount of money available to the borrower if they believe that the borrower will be unable to pay back the loan. Consumer loans can be an easy way to access quick cash, but you should still budget responsibly and use this type of loan only as a temporary measure.

Merchant Cash Advances

A merchant cash advance is similar to a consumer loan in that you are providing your credit card to a business in exchange for cash. However, instead of applying for a loan to pay for a personal purchase, you are applying for a cash advance to pay for a business or commercial purchase. Some of the major benefits to using this type of loan are:

  • No personal identification is required
  • The funds are typically available immediately
  • There are no income restrictions
  • It is easy to get approved
  • Low interest rates
  • There are no collateral requirements
  • It is less expensive than a regular loan
  • More flexible repayment options
  • More opportunities for profit

The major disadvantages to a merchant cash advance are:

  • You give up personal identity (i.e., your credit card) in return for the cash
  • This type of loan is considered a “high-risk” loan by lenders
  • The amount of money that you are entitled to is typically limited (i.e., you cannot take out a $25,000 loan for a new roof when you have only $5,000 to cover your current expenses)
  • You have to pay back the loan (plus interest) within 12 to 18 months
  • It is difficult to get an extension on your payments (i.e., if you are unable to make your monthly payment on the due date, you have to find another date in the next six to eight weeks)
  • Late payments result in additional fees and/or charges (i.e., if you are 10 days late on a $20,000 loan, you will be charged an extra $5,000)
  • Certain financial institutions will not allow you to use this type of loan if you have bad credit or no credit history at all
  • There are no government-backed loan guarantees
  • The profit margins for merchants who offer these loans are higher compared to regular loans, resulting in fewer opportunities for those who qualify

Leasing

A leasing transaction, commonly known as a business loan or equipment loan, involves the business owner providing the equipment (e.g., a vehicle) for the duration of the loan. In exchange, the business owner receives a portion of the cash back (i.e., the leasing “profit”). Some of the benefits to leasing include:

  • Cash-flow stabilization
  • Access to capital
  • Lower monthly payments
  • More affordable long-term loans
  • More efficient use of capital
  • No personal identification is required
  • Identity verification is simple (i.e., you provide your social security number)
  • Credit checks are minimal (i.e., just a phone call to verify your income)
  • There are no collateral requirements
  • Approval is easy
  • More flexible repayment options (i.e., no fixed monthly payments)

The disadvantages to a business loan through leasing include:

  • Higher transaction costs (i.e., fees and expenses associated with the loan, such as legal fees, insurance premiums, bank charges, and delivery fees)
  • The equipment becomes the property of the business (i.e., you can’t just walk away with it if you decide to leave the business)
  • The profit margin is smaller compared to other loan types
  • No government-backed loan guarantees
  • It is difficult to get an extension on your payments (i.e., if you are unable to make your monthly payment on the due date, you have to find another date in the next six to eight weeks)
  • Late payments result in additional fees and/or charges (i.e., if you are 10 days late on a $20,000 loan, you will be charged an extra $5,000)
  • There are no government-backed loan guarantees
  • Certain financial institutions will not allow you to use this type of loan if you have bad credit or no credit history at all

Additional Considerations

If you are wondering what factors you should consider when selecting a loan, there are three main things to look out for:

  • APR (annual percentage rate)
  • This is the interest rate that you will pay for the loan
  • LTV (loan-to-value)
  • This is the proportion of the loan that you will be financing (i.e., the amount you are giving compared to the total amount of the loan)

APR is the average annual percentage rate that you will pay on the loan. Most loans have variable rates, which means that they change periodically. However, if you are looking for a fixed-rate loan (i.e., one that does not change), you should opt for an interest-only loan or a no-interest loan.

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Many people think that a small personal loan is all about instant gratification. While there is certainly a rush to get emergency funds through a loan, it is important to keep in mind the long-term ramifications of taking out a small personal loan.

Here are the top pros and cons of small personal loans for bad credit.

Pro

The best part of taking out a small personal loan is that it gives you instant gratification. When your credit card bills are piling up and you need to make a quick purchase, you can pull out your mobile wallet and within seconds, you can find an offer. You might find it tempting to go for the offer that seems too good to be true, but if you look at the small print, you will see that you are not going to see any difference aside from the fact that you have to pay more in interest.

Banks and building societies will often give you a break on interest if you make the initial payment on time. So, even if you are paying more in interest than you would through a credit card, you are still coming out ahead. The fact that the money is available to you almost instantaneously is also appealing. You don’t have to worry about making an extra payment at the end of the month. Just remember to make your regular payment on time and you will stay in good standing with the lender.

Con

The down side to taking out a small personal loan is that it can be a slippery slope to overwhelming debt. Once you have obtained the initial emergency funds, it is easy to see how you could end up spending beyond your means. The temptation to buy that new smartphone or tablet is huge, and even those who can afford luxury items still find themselves driven to debt by the lure of instant gratification. So, while a small loan may seem like a quick and easy way to get some urgent funds, you must understand the long-term ramifications of credit card and personal loan dependency.

The best thing you can do if you are currently in debt is take a hard look at your spending habits. Are you spending beyond your means? Are you getting tempted by instant gratification? If you want to free yourself from debt, it is vital that you become independent of credit cards and personal loans. Instead, you must learn to live within your means. Set a budget and stick to it. If you are struggling to make ends meet, apply for a personal loans for bad credit. It may be humiliating to admit, but your credit history will actually work against you if you are applying for a small loan. The lender will see that you have had past credit issues and may decide that they do not want to give you any more credit. You must prove to them that you have changed your ways and that you are willing to be responsible. The truth is that you never really change your ways. You are just not being punished enough for your bad choices. So, if you are serious about changing your ways, take out a personal loan and start paying back your debt. Your credit score will be greatly improved, and you will be able to get the financing you need to grow your business. Don’t be afraid to ask for help if you need it. There are numerous organizations that may be able to provide you with some financial backing to get your business started up.

Best Suited For

If you are interested in taking out a small personal loan, bear in mind that you should aim to only do so when necessary. It is not advisable to use a small loan to pay for everyday expenses. For instance, if you want to buy a new pair of shoes, why not save up the money rather than borrow it? Once you have paid back your small loan, you can apply for another one. However, if you are chronically short of cash, it might be time to look into personal budgeting and cutting down on unnecessary expenses. Lenders may also decide that they do not want to lend to businesses or people with a bad credit history. So, if you are looking for a loan to invest in a business, it might be best to look elsewhere. The key is to never, ever, ever, ever, take out a loan you cannot afford to pay back. That way, you can enjoy the sweet taste of freedom without going overboard and adding more debt to your already stressed-out budget. Never, ever take out a loan you cannot afford to pay back. That is how you end up in a debt spiral. So, if you are looking for an emergency loan, verify the creditworthiness of the lending institution before entering into any kind of agreement. Ensure that you are not being fooled by any kind of trick or scam. Some lenders might try and trick you into taking out a loan by telling you that you qualify for a lower rate if you make some small payment now. But if you look deeper into the terms and conditions, you will see that you are in fact, charged more interest. So, it is always better to find a lender who is completely upfront and honest about the costs and terms of the loan. That way, you can rest assured that you will not be tricked or scammed, and that you are making the best possible decision for your particular situation. Sometimes, it is better to walk away rather than enter into a binding contract. You do not want to get stuck in a contract you cannot escape from. That is how you end up in a debt spiral. If you have the money, it is always best to save up for something you deem essential rather than to borrow it. The key is to become independent of credit cards and personal loans. They are useful in an emergency, but if you are doing well, it may be time to look at other options. Cut down on what you can and try to live within your means. If you want to get out of debt, it is important to take practical steps rather than waiting for a miracle to happen. Take out a personal loan and pay off your debts. That is how you improve your credit score and get the financing you need for the future. Do not ever, ever, ever, ever, take out a loan you cannot afford to pay back. That is how you end up in a debt spiral. So, if you want to take out a loan, verify the creditworthiness of the lending institution before entering into any kind of agreement. Ensure that you are not being fooled by any kind of trick or scam. Some lenders might try and trick you into taking out a loan by telling you that you qualify for a lower rate if you make some small payment now. But if you look deeper into the terms and conditions, you will see that you are in fact, charged more interest. Instead of taking out a loan to pay for something you want, why not consider looking into grants and other financial aid? Many companies and organizations offer loans and grants for specific causes. A lot of times, these loans are not subject to credit checks, and it is usually possible to get the money you need with no strings attached. Of course, this is not always the case, so do your research before entering into any kind of agreement. Research the terms and conditions of the loan you are considering and try to work out an agreement that is beneficial to you and the lender. Try not to let emotions get in the way of what is best for you. If you are feeling guilty about taking out a loan, remember that you are doing this for your own good. The sooner you pay off your debts, the better off you will be. You will be able to enjoy life how you want to without having to worry about money. So, do not feel bad about taking out a loan to improve your quality of life. That is what it is all about.

If you are looking for a way to earn more money with fewer hassles, you’ve probably considered looking into small loans online. After all, who wouldn’t like to have more money without risking going into debt or relying on someone else?

The good news is, you can apply for small loans online and, if you meet the right criteria, you can land yourself a loan without risking your physical wellbeing or financial security. Let’s take a look at what you’ll need to apply for a small loans online, so you can get the best possible chance at securing yourself some financial relief in the near future.

The Best Possible Credit Score

One of the most important things you’ll need to consider if you want to apply for a small loan online is your credit score. The better your score, the better your chances of being approved for a loan. If you don’t know where to begin improving your credit score, consider using a free credit report review to find out how your credit stands. You’ll get a free copy of your credit report from each of the three credit bureaus once a year. The reason this is important is because, as part of the loan application process, you’ll be required to confirm that your credit rating is fair. If your credit score isn’t up to par, you could end up struggling to get approved for a loan you need. Even if you do manage to get the loan, you’ll have to deal with high interest rates and additional fees. So, it’s best to take the time to improve your credit score now rather than risking being turned down for a loan later on.

A Valid Email Address

Another important step in the online application process for a small loan is verifying your email address. You’ll need to add this address so that the lender can contact you if they have any questions regarding the application. You won’t be able to get paid without it, so make sure you don’t miss out on any emails regarding your loan. You can use a free email service like gmail to verify your email address. Just remember, you’ll need to check your email on a regular basis so that you don’t miss any important emails from the lender. When you first set up a gmail account, you’ll be asked to verify your email address by adding a link to your site. Don’t worry, you’re not risking your credit by doing this. It’s just a verification process that will take less than 10 minutes to complete.

A Phone Number

Another important thing to include in your online loan application is a phone number where you can be reached. You’ll need to provide a phone number so that the lender can contact you in case they have any questions regarding the application. Just remember, this number will be used to contact you during the application process only and will not be shared with the lender once the process is complete.

Previous Employment

If you’re looking for a way to make money online, you can try applying for a gig-working at a temporary staffing agency. Most of these agencies will require you to have previous employment, so make sure you have something to bring to the table. You might also consider looking for a part-time job at a retail store, hospital, or restaurant. Whatever you do for work, make sure you’ve done it for at least a year and that you’re accustomed to working on your own. Stretching yourself too thin can leave you without any time off, which could lead to a diminished work performance and a lower salary. Plus, as we’ve discussed, employers aren’t going to be too thrilled to hear about your financial struggles. So, make sure you’re bringing something to the table before you start pitching your services to potential employers.

An Identity Theft-free Credit History

If you’ve ever been notified of a credit check or had your credit card revoked because of suspicious activity, you know how important it is to get those issues resolved. Your credit history is a litmus test for your ability to manage debt, so make sure you’re getting on top of those past issues. If you’re wondering how to clear your credit history of any fraudulent activity, consider using a free credit repair service to get those negative items removed. You’ll need to provide the service with the information they request so they can begin their investigation. Once that’s done, you’ll be given a formal letter informing you that your credit rating has been improved and asking you to confirm the changes via a telephonic credit check. You can then follow up with a letter indicating that your credit rating has been confirmed and requesting your credit card be reinstated. Remember, though, that this can take several weeks to process and you’ll have to be patient.

If you’re looking for a way to earn more money with fewer hassles, you’ve probably considered looking into small loans online. After all, who wouldn’t like to have more money without risking going into debt or relying on someone else? The good news is, you can apply for small loans online and, if you meet the right criteria, you can land yourself a loan without risking your physical wellbeing or financial security. Let’s take a look at what you’ll need to apply for a small loans online, so you can get the best possible chance at securing yourself some financial relief in the near future.

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