What Is a Flex Loan? Benefits and Drawbacks

Flex loans can offer quick access to cash, but there are potential risks

Fact checked by Betsy PetrickFact checked by Betsy Petrick

What Is a Flex Loan?

Flex loans are a line of credit that borrowers can use to get access to cash. The lender sets a credit limit, and you can borrow up to that amount, much like you would with a credit card. You will pay interest on the money you borrow, typically at relatively high interest rates.

Key Takeaways

• Flex loans are actually a line of credit, rather than a traditional loan.
• Flex loans allow you to access cash in an amount up to an approved credit limit.
• Flex loans may be an option for people with poor or no credit history, but lenders typically charge high interest rates.

How a Flex Loan Works

When you take out a flex loan, you can access a line of credit. You can borrow against that line of credit and repay what you borrow with interest.

With an open line of credit, you can continue to borrow up to your credit limit as needed. In most cases, you can pay more than your required minimum monthly payment without any penalties to pay the debt off faster.

A flex loan is usually an unsecured line of credit, which means you do not have to put up one of your assets, such as your car, for collateral. While you do not risk losing an asset, the lender assumes more risk if you do not repay what you borrow. As a result, flex loans typically come with higher annual percentage rates (APRs).

The APR on a flex loan reflects your borrowing cost, including fees. APRs can be useful when comparing offers from various lenders. The higher the APR, the more expensive the cost of borrowing. You may be able to secure a flex loan with an APR in the 24% to 28% range today, but APRs can reach the triple digits in some cases.

Benefits of Flex Loans

Flex loans can be an appealing option for some borrowers. Their plusses include:

• Minimal credit history requirements. Lenders offer some types of loans only to people with an established credit history and relatively high credit scores. Flex loans are often available to people with little credit history or poor credit scores. Often, lenders will not check your credit before offering a flex loan.
• Quick application process. You can often apply for and receive a flex loan within a short period of time, potentially even the same day.
• Fast funding. Once you are approved for a flex loan, you have access to the funds up to your credit limit.
• Flexibility. Some loans have a fixed term, meaning you have a set period in which to repay what you borrow. As it is an open line of credit, you only need to make your minimum monthly payments on a flex loan. There is no set deadline for full repayment.

Disadvantages and Risks of Flex Loans

It is also important to consider the potential downsides and risks of using a flex loan to get access to cash. Among them:

• Higher APR. Flex loans often have higher APRs compared to other loans, such as personal loans. That means the overall cost of borrowing is higher.
• Potential fees. The APR on a flex loan includes the lender’s fees, which can be significant. Some lenders may charge interest and a flat fee, while others charge ongoing fees. Plus, you will likely be subject to late fees if you do not make your minimum payments on time.
• Potential for debt. On one hand, the flexibility of this type of loan allows you to repay on your schedule. But you also risk accruing a large amount of debt. If you continue to use the flex loan and only make the minimum payments, your balance plus interest can grow significantly.

Should You Get a Flex Loan?

A flex loan can be a good option in certain situations. If you have inconsistent income, a flex loan can help you cover your expenses while you wait to get paid. If you need help covering an unexpected expense, a flex loan can also help. This option may be particularly attractive to people who wouldn’t quality for other kinds of loans due to poor credit.

Before you decide to get a flex loan, consider your ability to repay it. Will you be able to do so in a relatively short period of time, or will you need to keep borrowing against the line of credit? It is possible that continued borrowing and making only the minimum payments could lead to a significant amount of debt.

Alternatives to Flex Loans

If you need to borrow, you can consider multiple options. They include:

• Personal loans. Personal loans typically offer lower interest rates than flex loans, but they may be more difficult to secure depending on your credit score. Personal loans for bad credit are a potential avenue for some borrowers to consider.
• Payday loans. Payday loans are another way to access cash quickly. These are short-term, very high-interest loans, usually offered in amounts of $500 or less. Because of their sometimes-exorbitant interest rates and fees, they are outlawed in many states.
• Cash advance apps. Many lenders offer short-term loans or cash advances via apps. Cash advance apps allow you to borrow cash against your available credit. You will likely have to pay fees and a high interest rate on whatever amount you borrow.
• Friends and family. Depending on your situation, you may be able to ask friends and family for a loan. While this can complicate relationships, it may offer you more flexibility in repayment with little to no interest.

Do Flex Loans Hurt Your Credit?

Lenders often do not conduct a hard credit inquiry when you apply for a flex loan, which means the application process will not impact your credit.

But your borrowing activity on the flex loan could be reflected on your credit reports. Late payments or defaulting on the flex loan could negatively impact your credit score in a serious way.

Is a Flex Loan the Same as a Payday Loan?

While flex loans and payday loans both promise quick access to cash, they work differently. The amount you can borrow with a payday loan is based on your anticipated income. The amount you can borrow via a flex loan is determined by a credit limit based on multiple factors. Both options typically come with high interest rates and fees.

Can I Pay Off a Flex Loan Early?

You will need to make minimum monthly payments on your flex loan. You can also pay back more than the minimum, which allows you to get out of debt faster or replenish your credit line and borrow more in the future. You can borrow and repay indefinitely up to your credit limit because flex loans are open lines of credit.

What Happens if You Default on a Flex Loan?

If you cannot make the minimum payments, you will default on your flex loan. Defaulting on a loan comes with the risk of your debt being sold to a collection agency and legal claims against you. Defaulting on a flex loan could also seriously damage your credit score.

What Is the Maximum Amount I Can Get With a Flex Loan?

The maximum amount you can borrow with a flex loan will be determined by the credit limit set by the lender. You may be able to borrow hundreds or thousands of dollars, depending on the lender and your financial situation.

The Bottom Line

Flex loans can be an easy way to access cash if you have poor credit and need the funds to cover a gap in your income or an unexpected expense. However, it is important to consider the amount of interest you will pay and your ability to repay what you borrow.

If a flex loan makes sense for you, you should compare offers from a few different lenders. If you are concerned about the risks of taking on a flex loan, you can explore alternatives, such as a personal loan or borrowing from a friend or family member.

Read the original article on Investopedia.