What Is a Spot Loan?
Spot loans are personal or business loans that lenders issue quickly—or on the spot—to individuals or businesses for unforeseen expenses. Spot loans are installment loans, and for those who can pay the loan back on time, and can stomach the high interest rates, spot loans can be an intelligent alternative to other short-term loan solutions.
- Spot loans are short-term installment loans.
- Like other types of short-term loans, spot loans usually carry a significant interest rate.
- Spot loans are not the same as payday loans, and offer a significantly longer time horizon in which to pay back the loan.
- Spot loans are a financial instrument and are not to be confused with Spotloan.com, an online lending company that issues spot loans.
- Those that benefit the most from spot loans are those who can pay the loan back promptly and in full.
How a Spot Loan Works
Because spot loans are typically unsecured, meaning the lender isn’t given a specific claim on a borrower’s assets, borrowers will typically pay a higher interest rate on these loans. Instead of pledging collateral, borrowers qualify for loans based on their credit history and income. In many ways, a spot loan behaves the same way as credit card debt and, like credit card debt, it is a good idea to make all payments on time and in full when possible.
You can apply for a spot loan online, over the phone, or through your ATM. Borrowers must submit personal information including name, phone number, Social Security number, income, and the intended purpose of the funds. The process for approving the loan and its disbursal is in many cases completely automated, and a borrower can receive the funds in a matter of hours.
Lenders can approve these loans in as little as 10 minutes. A commonly issued spot loan is a type of mortgage loan issued to a borrower to purchase a single unit in a multi-unit building, such as a condominium complex. Some lenders must approve an entire building before they agree to approve a loan for a unit within that building. However, as long as the building meets certain broader requirements, other lenders will make a spot loan after approving only the unit to be purchased.
Spot Loans vs. FHA Spot Loans
The U.S. Federal Housing Administration (FHA) has a spot loan program that allows condo buyers to obtain an FHA-insured loan on an individual unit in multifamily apartment buildings, even in a non-HUD-approved complex. The program allows borrowers to get loans on condos when they might not otherwise have qualified.
The government had blocked these types of loans from 2010 to 2019. Now that FHA spot loans are allowed, this means that borrowers can receive financing, oftentimes much more favorable financing, for a dwelling where they otherwise would not have had the option.
A FHA spot loan is the terminology used to describe what is considered a "spot approval," and is not necessarily a loan in itself.
For a housing complex to become certified by the FHA program, its board of directors must submit detailed information on areas such as financial reserves, insurance, budgets, and numbers of renters. The goal of any regulation revisions would be to lower the burden on condo associations for FHA certification. The spot loan supersedes the certification process, but as a recipient of the loan, you'd still need to qualify.
Advantages and Disadvantages of Spot Loans
There are a few benefits of spot loans. Easy, fast access to money is the main benefit. Those with less than ideal credit scores can also benefit from a spot loan when a more traditional lender may have denied their request. If you need immediate access to money you are sure you are able to pay back quickly, a spot loan could be a worthwhile consideration.
Spot loans are considered a smarter alternative than a payday loan, but can still carry astronomical interest rates.
The disadvantages of spot loans, however, far outweigh the advantages. It is not uncommon to see annual percentage rates (APRs) over 300%. Even if you are able to pay back the spot loan in the time frame you signed for, you are paying well over your principal loan amount to the lender. Many consider spot loans predatory due to approving those with less than ideal credit with full knowledge they may be unable to make timely payments. In this scenario, the recipient of the loan can quickly be overrun with interest.
Almost immediate access to the loan
High approval rating for those with low credit
Simple application process
Making timely payments could increase your score
Soft inquiry application
Extreme interest rates
Ability to be underwater on the loan very quickly if late
Missing payments will negatively impact your credit score
Is a Spot Loan a Payday Loan?
A spot loan is different from a payday loan. A spot loan functions like a regular loan, commonly referred to as an installment loan, where you make your own payments and while they are on a schedule and like a payday loan carry a high interest, spot loans allow more time to pay back the loan and generally don't carry the exorbitant late or rollover fees that payday loans will.
What Happens If You Don't Pay Your Spot Loan?
If you don't pay your spot loan on time, you will continue to accrue significant interest until you have paid it off. Those unable to pay their loans on time will see the interest accrue to the point where they are paying multiples of the principle in the form of interest payments.
For this reason, it is imperative to assess your ability to repay the loan before you take one out, as interest accrues daily. Spot loans report your payment activity to the credit bureaus, so making on-time payments will prevent your score from being dinged.
Are Spot Loans a Bad Idea?
Spot loans are not necessarily a bad idea, but they can quickly become difficult if you are unable to make payments on time. Like other loans, spot loans carry an interest rate but since the loan period is usually shorter, the interest rates are much higher, and you may end up paying a significant amount of interest if you miss any payments.