By now, you’ve probably seen the commercials on TV for short-term loans. On the one hand, there are the obnoxious ones with rubber pensioner puppets. But the others tug at your fears: what if you have no money when some sort of desperate emergency pops up? Companies call these ‘Payday Loans’ or ‘Unexpected Commitment Loans’. The interest rates are astronomical and you can often find yourself paying back twice (or more) the amount you borrowed. For what was supposed to be a temporary fix, these loans can end up being an enduring pain in the neck. Here’s why you should avoid these where possible.
The short-term loan industry has enjoyed a massive growth spurt over the last few years, growing fourfold, with lending up to $1.9 billion. The average loan size is $464 and yet two-thirds of borrowers have an annual income of $40,000 or less. Typical representative APR on these loans can be an unbelievable 1,000-3,500%. So that loan of $300 can actually set you back $700 in real terms, and borrowing $1600 would actually set you back $3500 overall. There are also confusing additional charges and no sympathy for defaulting on payments.
Another tempting feature of these loans is the rollover option – the ability to increase the time over which you pay back the loan. You can also add more money to the loan, which just compounds the problem. These companies often actively encourage this, and you may be convinced that this is a good opportunity, but this will inevitably lead to paying back far more than you’d ever anticipated.
It should be conceded that there may be times when one of these so-called ‘Payday Loans’ could be advantageous. If you have something to pay for that simply can’t wait and you have no alternative; but only if you know for certain that you will be able to pay off the loan without incurring any further charges. The chances are, however, there is probably another option.
The first and most obvious place to start is to ask yourself if you really need this loan. If you want a new sofa that has a massive reduction in the Spring Sales, you could simply wait for the next sale – they’re on all the time and the immediacy you feel is manufactured by the company to make you think this is the bargain of a lifetime. It usually isn’t.
For those seeking a loan to make a special purchase of a car or a holiday, the loan is simply not worth it. If you are not in the position to purchase it, then taking out a short term loan to cover the cost will only place your finances in jeopardy. If you really want to make that special purchase, assess your finances; are you spending money each month on unnecessary purchases? Can you cut back and save money? For example, if you like eating out, why not eat out on a weekday when special offers and voucher codes are usually valid? If you spend too much each week at the grocery store, cut out the unnecessary treats, and take advantage of the special offers. Saving money and cutting back can be done, no matter what your income, if you fully assess your finances and add up the amount spent on evenings out, cigarettes or alcohol, food treats etc, the savings can be huge if you cut back. This can then be invested into other areas of your life where you are struggling. As for the car, why not buy a cheap second hand car until you are in the position to upgrade?
If you do not have the option of saving up for a purchase or the need is greater – outstanding rent, for instance, or a car repair – you still have other alternative methods of obtaining money. Have you considered asking a friend or family member? The ‘Bank of Mum and Dad’ is the go-to money lender of choice these days. The ‘Baby Boomers’ and subsequent generation currently have the highest disposable income. They would usually much rather you went to them for financial help than to a loan shark, plus they don’t have soaring interest rates.
Friends are a trickier avenue to take as the great adage says, ‘neither a lender nor borrower be’ – good advice keeping friendships from going sour, but so is ‘a friend in need is a friend indeed’. The upshot is you’ll need to consider if your friendship is strong enough to survive any hiccups with paying back the loan. Talk through the options with your friend or relative and be completely honest about how and when you can pay back the loan.
The appeal of short-term loans is immediacy, convenience and ease. Ultimately, however, none of these is true of a short-term loan unless you can be absolutely sure that you can pay it back right away, without being lured by extensions on the loan. They are available, primarily, as a result of the current economic climate – people need money instantly, without thinking of the long-term commitments. The best bet is to steer well clear, exploring alternative avenues before thinking about a short-term loan.
About the Author
Kirstie works with vouchercloud.com. She loves anything to do with money saving and finance tips.