Short-term loans, also called payday loans, have developed something of a bad reputation. In some ways this isn’t surprising. These loans typically charge much higher interest rates than conventional loans—lenders claim it is the only way they can make a profit considering that they lend relatively small amounts of money for relatively short stretches of time—and it’s easy for unwary customers to be caught in a vicious cycle. Add to that legal scandals and criticism from prominent members of the Church of England and you begin to see how this state of affairs has come about.
However, short-term loans are a financial tool like any other and can be beneficial if used for the right job.
When not to Use Them
If you’re not careful, short-term loans can lead to more problems than they solve. If you’re seeing some kind of regular shortfall, they’re not the answer. In the long run, the interest you pay on them will just turn into another expense. On top that some lenders impose late fees and default charges of as much as £25. Some borrowers even wind up taking out payday loans to pay off their payday loans to avoid these fees!
This will just create a situation where you are constantly in debt, and the pit just keeps on growing. They might seem appealing if you have a poor credit rating or don’t want to take the risk of a secured loan, but the spiral they can create means one poor decision can cost you for years to come.
When to Use Them
The best use of a short-term loan is to cover unexpected expenses or costs you would normally be able to cover if not for unfortunate circumstances. Before you take one out it is vital that you make a budget for the whole repayment period and are sure that you will be able pay back the full amount in a timely fashion.
If you do find yourself in such a situation, make sure you seek out ethical lenders like Smart Pig, who forgo late fees entirely, and check online to make sure your chosen lender hasn’t had any legal trouble.
If you follow this advice, short-term loans can be the valuable tool they were meant to be, instead of a pitfall.