What is a Flex Loan?

A flex loan, despite its name, isn’t actually a traditional loan — it’s a line of credit that gives you access to cash up to a predetermined limit. A flex loan may be a good option to consider if you need extra funds in between paychecks or an emergency expense comes up.

While a flex loan may be attractive, you might want to carefully think through how this loan may work for you, how you could use it, and any alternatives available to you so you can make the best financial decision.

How do flex loans work?

A flex loan is an unsecured line of credit that gives you access to funds. With an unsecured line of credit, you don’t have to put up any collateral (something valuable you own, like a house or car).

If you're approved for a flex loan, the lender will set a maximum line of credit. You can access the money as you need it, and typically the funds will be deposited into your bank account.

You can keep borrowing up to the limit if you continue paying down the balance (plus interest). If the lender allows, you may be able to increase the amount you pay back each month to pay off the loan more quickly.

In addition to interest, there are some common fees associated with flex loans. These may include lender fees, which can be either one-time charges or recurring fees applied each time you withdraw funds from your line of credit. You may also face late fees if you fail to make at least the required monthly payment by the due date.

Interest typically begins to accrue as soon as you make your first withdrawal from the credit line –– not when the account is opened. From that point on, interest is calculated on the outstanding balance until it’s repaid. If you make additional draws later, those amounts will also begin to accrue interest immediately upon withdrawal.

Pros and cons of flex loans

There are some potential pros and cons you might want to consider before you apply for a flex loan.

Pros

• No collateral required: A flex loan doesn’t require you to put up collateral to secure the loan. You don’t have to worry about losing your car or home if you fall behind on payments.

• Flexibility on credit history: Depending on the lender you apply with, you could be approved for a flex loan even with a less-than-perfect credit score or limited credit history.¹

• Quick access: You can access cash through your line of credit, which is typically deposited right into your bank account so you can start using it right away.

• Only pay for what you use: You're not required to borrow the full amount of the flex loan, and you only pay interest on the funds you take out. Interest starts to accrue on the money you borrow when you make a withdrawal.

• Repay as you go: You can borrow as needed during the draw period (the time when you can access funds) and make the required monthly payments each due date as you pay down your balance.

Cons

• High interest rates: Flex loans generally have higher interest rates, because the lender takes on more risk with a line of credit.² High interest increases the overall amount you need to repay and could make it more difficult to pay down the balance.

• Fees: Some lenders charge interest and an initial flat rate fee to take out the line of credit and additional fees each time you withdraw funds. There may also be fees if your monthly payments are late.

• Unmanageable debt: If you keep withdrawing money from your flex loan while only repaying the minimum amount each month, you could end up with a large balance that could be difficult to pay off.

Explore better loan alternatives

There are options beyond flex loans to consider, based on your personal circumstances and reasons for needing money. These include personal loans, credit cards and borrowing money from family and friends.

Personal loans

A personal loan can be used to cover everyday expenses like car repairs and unexpected bills or more significant expenses such as home improvements.

You can get a personal loan through a bank, credit union or licensed lender. OneMain offers secured and unsecured personal loans with fixed interest rates and a set date to pay off the loan.

Credit cards

If you’re still unsure about which option is the right step for you, using a credit card might also be worth exploring.

However, it’s helpful to remember some of the downsides to using a credit card to pay for major purchases. High interest rates and a growing credit card balance, if you only make the minimum monthly payments, could strain your finances over time. Credit card balances which are subject to finance charges are often based on a variable APR which can change, up or down.

Borrowing from friends and family

Another alternative to a flex loan is borrowing the money from family or friends. This could be a good way to avoid high interest rates, credit checks and strict repayment terms compared to other loan types.

That said, you’ll want to have an open and honest conversation with the friend or family member you’re borrowing from about the exact amount you need and how and when you plan to repay it. It’s helpful to come up with a clear repayment plan with set amounts and dates. Make sure everything is documented to keep the transaction organized and demonstrate that you are a trustworthy borrower, even if you did grow up in the same household.

Taking money from people you know could cause tension in the relationship if you don’t repay the loan in full, on time or in other ways you might have promised.

Consider all your options

As with any big decision, it’s helpful to weigh all your options when thinking about a flex loan. Consider your budget, lifestyle and why you are thinking about applying for a flex loan in the first place. A flex loan might help you get access to cash in the immediate term, but you may find other options that are more suited to helping you make the most of your money and grow toward your goals.

Sources

1, 2 https://www.investopedia.com/what-is-a-flex-loan-benefits-and-drawbacks-8695123.