While short-term loans are very helpful if you are in need of quick cash, remember that it also carries some serious downsides that should leave you to pause before committing to the loan terms. Often, if we are in a very tight binge, we forego all of that downside in favor just getting the money that we need. However, when you are in a far more advantageous financial position, take the time to think about these downsides so you can slowly but surely make the commitment to try and stay away from these types of loans unless absolutely necessary. Payday loans can cost lots of money.
High interest rates. Short-term loans carry some of the highest interest rates of any loan available. This is because the nature of short-term loans, one that requires little to no collateral, requires creditors to hedge their money via some other means. Eventually, that results in higher fees for the borrower. Payday loans, for example, can have effective interest rates of up to 10% and even higher for a loan that matures within a two-week period. Contrast that with medium and long-term loans with far more palatable interest rates and you see how this is a very serious downside.
It breeds a cycle of dependence. Another downside to short-term loans is that it breeds a cycle of dependence. Everyone wants to be financially independent but those who have relied on short-term loans for some time, regardless of the exorbitant fees, eventually go back and do it again and again. This cycle of dependence arises from the fact that short-term loans are perceived to be an “easy-way-out” of a financial tight spot and are therefore used to remedy all sorts of financial situations, even those that do not require short-term loans. This is a psychological downside that breeds a bad habit, one that has to be cut at the bud before it blossoms into a full-blown cycle of bad lending habit.
It helps to remember that there are other alternatives to short-term loans. First, taking a stab at making your own budget and doing what you can to stick to that budget will help in the long-term. Being open about your monetary situation to family and friends may also open other alternatives for friendlier loan options. You can also restructure current debt so you won’t have to settle everything all at once.
Remember, the relative ease with which short-term loans can be secured does not mean this is the best option for you. Take the time to think through the downsides of short-term loans and make the necessary adjustments to remove yourself from the prospect of constantly relying on these types of loans for cash. It may be hard in the interim but once you develop the right habits, you are well on your way to financial independence in the long-term.