There are many households today living paycheck to paycheck. These families barely have enough money to pay the bills each month, and many of these families’ budgets are disheveled the moment a financial emergency arises. Whether it’s an emergency car repair, or an unexpected medical bill, even a few hundred dollars could set you back for the next few months.
Fortunately, there are financial resources that can be relied on in your time of need whether you have perfect or poor credit – short term loans. Short term loans, often referred to as cash advances or payday loans, can be beneficial… when they are used correctly.
A Quick Fix When In Need
When you’re in need of a few hundred bucks, one of the easiest ways to get these funds is to apply for a short term loan online. There are literally hundreds of companies across the country that advertise attractive short term loan offers. When consumers in need see things like, “Bad credit ok. No credit check. No employment verification” many are swayed to apply.
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An instant approval will get you a few hundred dollars to handle whatever financial emergency you have. So what’s so bad about these types of loans? Nothing… unless, of course, you fail to be a responsible borrower.
Take, for instance, these most common mistakes listed below:
1. Failing to Review and Understand Interest Rates and Fees
When you’re in a financial jam, chances are you’re not thinking about what you’ll need to pay back. In the heat of the moment, all you’re concerned with is the amount of funds for which you can be approved. Many consumers skim through the contracts and simply sign so that they can receive their funds.
However, the interest rates and fees are extremely important and will need to be repaid as well. For instance, for every $100 you borrow, the lender may require you to pay back $30 extra. This means for a typical $300, you’re looking at a total of $390 to repay the loan.
Consider This: Before signing on the dotted line you need to ask yourself if you can afford the extra $90 you’ll have to repay on your next pay date. If not, you may want to consider asking for a lesser loan amount to fit within your budget.
2. Taking an Extended Amount of Time to Repay
Another thing that makes short term loans so attractive is their repayment options. Taking the example from above, If you don’t have the $390 to pay upfront on your next pay date, you can easily ask for an extension and only pay $90. Sounds good right?
However, what is not fully understood is that the $90 you’re paying on your upcoming pay date does not go towards your outstanding balance of $390. It is simply a fee you’re paying to extend the loan out another two weeks.
So, assuming you pay within the next two weeks, you will have paid $480 for a $300 loan. If you extend the repayment amount out further, you’re looking at more money for what was originally a $300 loan.
Consider This: Natalie Cooper of BankingSense.com gives a great breakdown of how much a short term loan could end up costing you in this article. Ideally, you should be able to repay the loan within the two week timeframe you’ve been given. While problems do arise that might cause you to have to extend the loan out, you should try to pay it off ASAP to avoid extra costs.
3. Taking Out More Than One Loan
Short term loans typically have minimal eligibility requirements. You will probably need a checking or savings account and some form of income. As such, they can be pretty tempting to keep applying for. If you get approved for $200 from three different companies, that’s a total of $600 to take care of your financial emergencies.
Consider This: At the time, you’re simply worried about getting enough money to pay for your emergency, but you need to consider all the costs involved. Each loan will have additional fees that will be accumulated every two weeks. If you cannot pay all of the loans off within a decent amount of time (ideally the agreed upon time of 2 weeks), this is going to end up costing you more than you may have imagined.
4. Neglecting the Loans Altogether
Another common mistake borrowers make when taking out a short term loan is simply neglecting the loan altogether. After several weeks of paying excessive fees many begin to feel overwhelmed and simply avoid repaying the debt altogether. How is this accomplished? By closing out checking accounts into which the funds were deposited. It may seem like a good idea at the time but it can catch up to you.
Consider This: Closing your checking account might get them to stop debiting from your account for a few months, but what is not considered are the fees that are tacked on to your outstanding balance. Just because you stop having the funds automatically deducted does not mean that the debt will disappear. Every two weeks they will tack on the interest and fees, not to mention they may also be entitled to add on returned check fees for every time they’ve debited your account. If you’ve gotten in over your head it is always best to reach out to the loan company and work out other arrangements.
US News points out that one of the most common mistakes borrowers make when taking out a loan is not thinking about the long term. Each of the above mentioned mistakes might seem minimal in the beginning but can actually end up costing you big in the long run. This doesn’t mean that you should never use a short term loan if you’re in a jam, but what it does mean is that you should consider everything involved in borrowing these funds. Only borrow what you can repay, and do the best you can to repay the loan amount in the agreed upon time.
Most importantly, if you do borrow funds and get in over your head, it is better to communicate with the lender than it is to ignore the problem as it does not ever go away. Hopefully this has given you some insight on how to responsibly borrow money in a way that will not damage your finances in the future.