There’s something uniquely stressful about needing money when you’re broke but a week away from payday. The car breaks down on a Monday morning. You need an unexpected root canal and the dentist quotes you $800. You’re in an unfortunate dilemma where the timing isn’t right, but your bills will not wait.

That’s why cash loans exist. They bridge the period between needing cash and having it. However, they also operate very differently than many expect, and knowing the ins and outs can shift someone from corrective to problematic.

What Actually Constitutes a Cash Loan

The problem is that the term is thrown around for many different products that confuse people almost immediately. In the Canadian market, when someone talks about needing cash loans, they refer to short-term personal loans to help with immediate financial situations. This does not include payday loans, although they fall under this umbrella, and it generally excludes credit cards and lines of credit.

Cash loans can be anywhere from $500 to $5,000, and repayment terms are anywhere from two weeks to several months. They are loaned cash at a quick speed; thus, the only consistent factor is timing, people need money before their next payday, not in two weeks once the traditional banking system considers the approval process.

For example, the application process is relatively simple. Most people get approved for at least $500 through a bank within 24 to 48 hours. Lenders want proof of income (pay stubs), bank account information and identification, essentially. Some require three months of employment history on record. Credit scores matter to an extent, some lenders do not want people in poor credit debt, but consistent income proving cash flow is more critical than current debt.

How You Get the Money (And When)

In most cases, once someone qualifies for a cash loan, lenders will put it directly into their checking account through electronic means. The speed comes into play here; traditional banks need time for transfers, but cash loan companies have more refined processes that allow for expedited funds within hours of approval.

For example, some companies offer e-transfers that are completed immediately (if the receiving bank can do so) or standard direct deposit which takes one business day. Very few still offer cheques to be given in person or mailed; this is counterintuitive since cash loans aim to help borrowers as fast as possible.

However, “instant approval” is a myth. Instant approval means someone will get an answer quickly; however, that answer may not translate into cash until the next business day. If someone applies for cash on a Saturday night, even if they are approved immediately, they’ll be waiting until Monday for cash unless they have it sent via another route.

The Expense Beyond Interest Rate

This is where things get expensive, and most people don’t realize this until already committed. Cash loans come with far higher interest rates than personal loans, sometimes exorbitantly higher. For example, if a bank charges 7%-12% interest on personal loans per annum, cash loans can be anywhere from 20% to 47% or more per lender/risk ratio.

However, that interest rate only matters to an extent; many lenders charge considerable fees along the way. There may be origination fees (generally 1%-5% of the loan), processing fees and miscellaneous administrative charges along the way. Therefore, getting a $1,000 loan could amount to $1,200 or more by the time someone pays it off, even within the short term.

Other Canadians exploring options suggest that certain lenders make a huge difference in overall cost due to cash loans comparison resources lending various sources better options than others depending on scenarios and needs.

In addition, repayment structure matters if someone wants to pay it back all at once or try installment arrangements which take longer between pay periods but extend how much interest someone has to pay back in total.

What Happens During the Application Process

It takes about ten minutes for someone to qualify during the application process if they have everything ready to go. Most applications occur online, so someone could apply at 11 PM on their couch if they feel they need cash.

They’ll ask about employment situation (how much someone makes and what their expenses per month look like), not nosy but making formulas about whether loan repayment is feasible plus combined debt payments plus current expenses. Some lenders have automated decisions, they approve or disqualify based on algorithms operating differently across sites, while others have humans reviewing applications which may take a couple of hours longer but may show compassion for more nuanced situations.

Someone must provide satisfactory levels of income verification to determine whether they can keep loaned funds once income is verified. Some lenders want three months of bank statements showing consistent deposits versus basic pay stubs from the last payday. Others use open banking technology, where they can look at a borrower’s bank account directly (with permission) to see if they have anything else going on.

Repayment Reality

This is where it gets tricky; once repayment terms are established, they will withdraw it preauthorized through your bank account on the intended payday you designate upon agreement of funds. Unless you state otherwise, they exercise the right to take money back as agreed upon.

The problem occurs when borrowers still need additional cash when payment time rolls around. For example, if someone borrows $1,000 for their car repairs, and thanks to exorbitant fees they now owe $1,200, and that $1,200 comes out on payday but results in the borrower still having no rent money but a few extra dollars for groceries, which means that payment might come out, but now they are back where they started, where they need money before their next payday.

This creates frustrating loans because people find themselves back in the catch-22 situation instead of being fixed; people then take out another cash loan to pay off the first one; then take out another one; then one more; finally increasing what could have been a $1,000 emergency over six months into something that’s now $3K.

When These Loans Work (And When They Don’t)

Cash loans work when there’s an emergency that people feel will not arise again anytime soon and there’s enough level-headedness above and beyond it to figure out a repayment plan before trouble occurs during daily life. For example, if someone’s car breaks down and it’s their means of transportation and they know they’ll have enough for their next paycheck, even accounting for repair costs, loan repayment within a week makes sense.

Beyond emergencies, general need before next paychecks, they don’t work. If you consistently need money before your next paycheck, for groceries or commuting, instead of finding additional ways to make more money, or stop spending so much, cash loans just shift debt around instead of solving it.

They don’t work well for giggers either. Gig workers/freelancers/seasonal employees get approved without backpay from their recent jobs in many cases; however, once approved for funds by lending companies, who don’t care if your paycheck came slow instead, will immediately demand funds through that preauthorized payment, and if there’s none there, and an overdraft fee results, you’ve just made your situation worse.

What To Beware Of

Not all cash loans work with the same good name; not every lending company operates as they should and while lenders may have legitimate reasons for running companies that help individuals when they’re down on their luck with decent (albeit high) costs, others are predatory.

Beware companies without clear outlines regarding fees/interest repayment structures, if cash loan providers want to give you more money than you applied for due to any reason, like you say you’ll need more but truthfully do not, or if companies lend without caring if your income justify repayment, they won’t be without caring about you being able to repay them because they’re out for themselves.

The Bottom Line

Cash loans serve a very real purpose when necessary; when you’re in trouble before your next pay check, and it’s a legitimate emergency, they’re strong resources to help fix problems, but they’re far more expensive solutions that work best only one-time fixes instead of habitual programs.

As long as educated borrowers know all factors involved, from potential unexpected costs to reality checks with repayment, and they’re operating honestly with themselves about whether borrowing is worth it or only postpones the reality, they’re not the worst idea out there, but they’re certainly not ideal either. For people still at risk anyway, it makes a complicated situation worse, but for those with legitimate means who urgently need supplemental help, they’re unfortunately one of the least worst options on the market.