Short term loans, also referred to as payday loans, are a great financial solution for those individuals who have difficulties with covering major or emergency expenses. But at the same time, you should keep in mind that these loans can often lead to more financial troubles if you do not manage them properly. They are normally not recommended by experts. In case you are interested in applying for a short term loan, it is important that you work out the pros and cons of this solution. It is essential that you understand the basics of short term loans such as how they work out and what alternatives you have available.
Short term loans can provide instant money to ensure that you do not end up in a financial crisis. The amounts offered by the creditors are sufficient to help you meet the basic expenses in your life. You can borrow only a limited amount of money for a very short period of time. Creditors normally do not impose stringent conditions and checks as is the case with long term loans. However, in most cases, you will be required to provide a written check for the amount of money that you will be borrowing. You will also need to pay a charge for the service. The check will be left with the creditor and they will cash it as soon as you are able to pay back the money you borrowed. In case you are unable to repay the short term loan when it becomes due, you can always have the term extended but keep in mind that you will have to pay an extra charge every time you get a new extension.
Short-term Loans are Expensive
Short term loans are among the most expensive of all types of credit products available in the market for households and businesses to use. The annual percentage rate is usually several hundred percent. You will be required to pay a considerable interest amount at the end of the repayment period. For example, if you want to borrow R100 for two weeks, you may end up paying up to R20 in the form of borrowing charges. This means you will be paying an annual percentage rate of 426% on your short term loan to the creditor.
Therefore, the biggest disadvantage of using a short term loan is the cost. The fees can be extremely high and you may even end up in a vicious cycle of debt. Your financial situation can worsen considerably.
The rate of interest on these loans is often very high and it adds additional burdens on your already crippling finances. The overall amount of debt increases in the long run if you constantly rely on short term loans to satisfy your basic needs. Therefore, even though they may work out for you once or twice, they can never be a feasible option for long term use. For example, a short term loan would be a great idea if you want to get your car repaired but do not have a sufficient amount of cash available to go ahead with this expenditure. However, relying on this loan option is always discouraged.
Apart from that, there have been several instances when the checks given by debtors bounced on the due date when the creditors tried to cash them. This will land you into more trouble since your bank may start charging you for overdraft. In the long run, the bank may not want to work with you anymore. Moreover, your credit score also suffers a major setback because of this reason. If you continue to default on your payments on the short term loan, you may have to deal with a debt collector. Eventually, a lawsuit may be filed against you by the lender.
It is important to make all of your payments on time since you will otherwise be paying extra charges. The interest payment would also increase with every passing day.
More and more financial and lending institutions are taking greater interest in the short term loan market. Traditional bank loans can be very hard to get especially if you already have a bad credit score. At the same time, you should keep in mind that even those short term loans provided by banks are quite similar in nature to any other type of short term loan despite the fact that banks do advertise them with different names. Moreover, you will discover that the terms and conditions that apply to these types of loans provided by banks are even more restrictive. That is why these loans may be even more challenging to repay. The bank obviously has full access to your financial information and can withdraw the due payment directly from your account. Moreover, they may also require you to place an asset as security when applying for the loan. This puts your finances and wealth at even greater risk since in case of default, you can lose the asset.
Short term loans can be very risky
At the same time, you should keep in mind that all debt options carry a certain degree of risk if you do not utilize them efficiently.
There are ways in which you can avoid using these types of loans altogether. Start by building an emergency cash fund and put the money in your savings account. This may be very difficult for those who are already in a financial turmoil, however. Your credit score is of paramount importance. You need to make sure that you do not borrow too much to keep it in good condition. You should always have a credit card at hand in case of an emergency situation. A signature loan is always a good idea. You can get it from any bank in South Africa.
Some people take another job so as to earn extra source of income and pay their expenses. Renegotiate your payment plan with the lender, if you already have considerable debt accumulated. Peer to peer lending also happens to be a great option.
If you make your repayments on the short term loan on time, it will be less expensive. This is because you will not be incurring any of those extra charges or interest expenses. They are after all the quickest and easiest way for getting finance.