Short term loans have a very valid place in the lending industry. They fill a gap that is little cared about by the mainstream banks and creditors, and they provide a legitimate source of quick cash that when used correctly, is cheaper than the alternative charges that loom in wait if you miss a payment on a card or service. That being said, the key term to take here is ‘when used correctly’.
If you know the rules and the rates and you follow procedure then they can be a valuable lending source. There are some occasions though when taking a short term loan is not the best course of action to take, and there are behaviours that can have very damaging consequences if not thought through carefully.
Here we will look at the 7 worst things you can do when taking out a short term loan, and why it is important to think carefully before signing on the dotted line.
1. Take it when you know you can’t afford it
Part of the function and of the market for short term loans, is for those that have a little urgency over when they need the cash. They are often taken by people that need quick if not immediate help to tide over for a few days or until payday. Whether you need it for an emergency or to avoid missing an important payment, you should never take a short term loan if you know you cannot afford to pay it off in time.
If you know you can’t afford to pay it back before you take it, you are willingly entering a minefield. You really need to look at your bigger financial picture and consider alternatives that have more flexible and forgiving terms. If your options are exhausted then speak to the company you are due the payment to and try to and advise them of your situation. There is no point in taking out an additional product you can’t afford to cover one you are already struggling to pay for.
2. Lie
The worst thing you can do when taking out a short term loan is lie, to yourself, or to a creditor. If you lie to yourself about your ability or intention to pay it off, you are setting yourself up for a fall. If you lie to a creditor about your financial ability or any of your personal details then you are again setting yourself up for a fall but could also be breaking the law.
Now, I am a firm believer of living in the moment, of acting rather than stalling – the latter can be equally as damaging when time is of the essence. That being said however, if you live in the moment you have a duty to your own future to act responsibly and lying does not put your best interests first.
3. Take it without paying attention to the terms
It is easy when you are in hurry to secure the credit you need to want to just put pen to paper and get the money into your account, but it is absolutely essential to know exactly what you are committing to. The small print is critical, and the terms detail exactly what you are agreeing to as well as the consequences of failing to meet that agreement. How can you know you can commit to the terms, or that they are reasonable and fair if you don’t know what they are?
4. Squander it on junk
A short term loan should be seen as an emergency loan, or a crutch to see you over a short period of time. While convenient, it should only really be considered to cover your ‘needs’ not your ‘wants’. They can be great for covering an unexpected bill, such as a car repair, where you need the money fast and have few alternatives. But you do pay interest and the more you borrow the more you pay back. So they are great for an unexpected bill, but you are throwing your money away if you decide that on top of borrowing the amount you need to cover your ‘needs’ that you also want to borrow to go out for the night, to buy some new clothes, fill up on junk or consumables. These extras can wait until payday, you don’t need them and if you borrow for these ‘wants’ you are paying far more than their value with the interest premium.
5. Give in to impulse
Much as above, if you are taking a short term loan, do so for a specific purpose and not as a means to indulge in luxury. This type of loan is not designed or tailored for extravagant spending or for fun, and certainly not for gambling. If you want to be able to indulge in some luxury spending then this is not the type of credit for you, far better with a long term agreement that spreads the cost of paying it back. There is no point in taking out a short term loan for a new TV for example, because you saw it on offer and it looks a really good price. The cost of interest you accrue would nullify the promotional price and leave you with a hefty amount to pay back in a short time.
6. Poor preparation and underestimating your needs.
One thing to consider when taking out a short term loan is that it can be more damaging not taking out enough than it is to take too much. If you do not take enough out to cover exactly what you need to pay for, you could end up with a charge or fee for missing payment (for example a credit card bill) and also still have the loan to pay back as well as any interest accrued. It is important therefore to fully understand your needs, and to prepare ahead of requesting a short term loan. If, for example, you need a loan to cover an emergency car bill, it might not just be the cost of repair you need to consider into the loan, but also the cost of alternative transport while the car is being fixed. Always consider your full needs.
7. Clam up when trouble hits
Sometimes, even with your best intentions and greatest of efforts, the unexpected will happen and you enter a position where you can’t meet your end of the agreement. Perhaps you become ill or are faced with an out of the blue redundancy. When this happens, although very stressful, you need to pick up the phone and speak to your creditors. The stress is only ever magnified when we bury our heads in the sand. If you don’t inform your creditors of a problem they will assume all is normal and expect payment on time and within the agreed terms, and they will charge you accordingly if you fail to meet these terms.
If you pick up the phone and talk to them, you make them aware of your situation and can come to an alternative agreement. By taking action at times like this rather than diverting and clamming up, you can avert a downward spiral of one negative event turning into another, then another and begin your road to recovery much sooner.
A short term loan can be a very useful credit source and fit right into what you need, when you need it. However, as with any credit agreement it is a serious commitment and I hope that the information in these 7 steps can help guide those that would apply to think about what they need the loan for and how to avoid any
