What is a flex loan and should I get one?

For borrowers looking for quick money and a straightforward application process, flex loans offer access to a line of credit that works similarly to a credit card. High interest rates are common, which can make this type of loan expensive and financially risky.

Most people appreciate flexibility, which is probably why flex loans can sound so appealing. But with a flex loan, you could pay a high price for that convenience — even triple-digit APRs. Read on to find out more about what to consider with a flex loan.

What is a flex loan?

A flex loan isn’t really a loan at all — it’s an unsecured open line of credit. If your loan application is approved, you can withdraw cash at any time up to your approved credit limit, which can be a few hundred to thousands of dollars, depending on the lender and how much you’re borrowing.

In some ways, a flex loan works like a credit card. Flex loans come with a credit limit. You’ll be charged interest for amounts you’ve borrowed. You should get a monthly statement. You’ll have to make at least a minimum payment every month. And you might be charged a fee daily, monthly or even every time you use your flex loan.

It’s important to understand the difference between a flex loan and a personal line of credit from a bank or credit union. Many banks and credit unions offer lines of credit for individual borrowers and businesses. Rates, fees and repayment terms depend on multiple factors, including your credit scores, or whether your line of credit is secured with collateral or is unsecured. Good credit and collateral may help qualify borrowers for favorable terms on a line of credit from a bank or credit union.

But flex loans are unsecured and can be an option if you have rough credit or little to no credit history. Flex loan lenders may not require a credit check. But as with virtually any type of credit, the more risk the lender assumes, the higher the interest rate you’re likely to pay.

Dangers of flex loans

Before we get to the bad news, here’s a look at what’s attractive about flex loans.

• You can borrow all or some of the funds you have available.
• You may be able to get money quickly.
• You may get flexible payment terms, like a minimum-payment option.
• If you don’t borrow up to your limit right away, you’ll preserve your ability to borrow more later on.
• You might not need good credit to qualify for a flex loan.

But those benefits come with some clear dangers.

Sky-high interest

While many states have laws that aim to regulate predatory lending, the cost of short-term loans can be extremely high. For example, according to a 2017 report from the National Consumer Law Center, laws in some states allow certain lenders to charge triple-digit APRs. And if a state allows a lender to calculate interest on a daily basis, the amount of interest you pay on a flex loan could really balloon.

Minimum payments add up to big interest

Like credit cards, flex loans may allow you to make minimum monthly payments — but that often adds up to maximum interest. Minimum payments make it hard to completely pay off your balance, because interest continues to accrue.

Flexible borrowing can lead to excessive debt

Flex lenders may tout the fact that you have to apply for the line of credit only one time, and you can use it repeatedly as long as you haven’t reached your limit. Unlike a closed-end installment loan, flex loans might not have a specific end date. It’s potentially a recipe for trouble the same way it can be with credit cards — you continue to borrow and pay interest without substantially reducing the amount you owe.

Because a flex loan is an open line of credit that you can borrow against at any time up to your limit, you might take on more debt than you can manage now or in the future, when your financial situation might be different. A closed-end personal loan with a fixed loan amount and specific repayment term doesn’t come with this risk.

Bottom line

Flex loans (which have more in common with a line of credit than an installment loan) may give you fast access to cash, but you could pay a high price for that convenience. Triple-digit APRs, composed of high interest rates and fees, aren’t uncommon for flex loans. And if there’s no end date for the debt, you can continue borrowing and paying high rates indefinitely. Look at the terms of any flex loan offer carefully — you’ll want to fully understand the pitfalls and costs before you go that route.

If you have healthy credit or collateral, you may be able to get better terms and interest rates with other types of borrowing, like a personal loan, a payday alternative loan (if you’re a member of a participating federal credit union) or even a credit card.

And before you borrow money, always think about why you want a loan, how much you want to borrow and how you’ll repay that amount. If you need cash for a short-term emergency, consider getting a temporary part-time job or side gig, or borrowing from a friend or family member who can help you out with a repayment plan that will be more affordable for you than a costly flex loan.

*Approval Odds are not a guarantee of approval. Credit Karma determines Approval Odds by comparing your credit profile to other Credit Karma members who were approved for the personal loan, or whether you meet certain criteria determined by the lender. Of course, there’s no such thing as a sure thing, but knowing your Approval Odds may help you narrow down your choices. For example, you may not be approved because you don’t meet the lender’s “ability to pay standard” after they verify your income and employment; or, you already have the maximum number of accounts with that specific lender.