Don’t get stuck in a never-ending cycle of short-term loan debt.
Short-term loan services have never been more ubiquitous. A whopping 24.6 million Americans now have personal loans totaling a combined $253 billion. And with the economy still reeling, quick-fix lenders see a growing market of people in need of fast financing.
But…
Not all short-term loans are created equal. While some services help you get out of a financial jam without breaking the bank, others are designed to ensnare you in a never-ending cycle of debt.
In this guide:
- Short-term loan basics
- The true costs of quick cash
- Warning signs to avoid
- Viable (and effective) alternatives
- How to choose a reputable lender
What Are Short-Term Loan Services?
Short-term loans are exactly what they sound like: a financial product with quick application and disbursement and a repayment period of a few weeks to 18 months.
This category of loans can be further broken down into:
- Payday loans (due in 2 weeks)
- Personal installment loans (3-36 months)
- Cash advances (variable)
- Title loans (secured with your vehicle)
These options all have one thing in common: they can help you get money as soon as the same day, typically without a credit check. They are ideal for when traditional banks or credit unions take too long to process your application or won’t approve you.
But…
The lower standards and fast cash come at a cost that can make your eyes pop.
Hidden Costs That Will Destroy Your Budget
Curious about the exact cost of a short-term loan?
Interest rates can climb as high as 400% APR or higher. To break that down, if you borrow $300 for two weeks, you’ll have to pay back a total of $345 or more.
Doesn’t sound too bad, right? Unless you realize a few key facts:
- Few borrowers can repay on time
- Rolling over a loan just adds fees
- Missing a payment means even more fees
- Defaulting will hurt your credit score
And then there’s the fact that the average short-term borrower pays more in fees than they initially borrowed. Literally.
Warning Signs to Run From
Bad news: not all short-term loan lenders operate in good faith. When searching for an option that will help, not harm, your financial situation, look out for these red flags:
No credit check. While this may seem like a good thing, reputable lenders want to ensure that you are able to repay the loan.
Pressure to decide now. Any lender who insists you sign today without taking time to review the terms may have something to hide.
Unclear terms. If you can’t clearly understand when and how much you will have to pay back, don’t sign.
Upfront fees. Legitimate lenders will deduct their fees from your loan amount, not ask for money from you up front.
Only online/operating from a P.O. Box. Online short-term lending is perfectly legal. But be wary of a lender that only operates online, from a temporary office address, or doesn’t appear to be licensed.
When Short-Term Loans Make Sense
OK, here’s the thing. Short-term loans aren’t inherently bad. They can be a perfectly acceptable and even recommended choice under the following circumstances:
- You have a legitimate emergency (medical emergency, car repair, etc.)
- You are certain you can repay the full amount on the original due date
- It costs less than overdraft fees and late payment penalties
- You’ve exhausted all other options
But one thing to understand:
Short-term loans should be your last resort, not first choice. If you’re taking out multiple loans in a year to cover basic expenses like rent and groceries, that’s a sign of a much deeper problem you need to address ASAP.
Alternatives That Are Effective (And Won’t Ruin You)
Don’t have all your ducks in a row? Short-term loan services are helpful. But here are some lower-cost or even free alternatives to consider first:
Credit union loans. Many credit unions offer small-dollar, short-term loans at much better rates than payday and title loans. And if you’re not a member, it’s fast and affordable to sign up.
Payment plans with creditors. Call the utility company, landlord, or creditor and ask if they’ll work with you on a payment plan. Many are willing to if you’re upfront and explain your situation.
Cash advance apps. Earnin, Dave, and other cash advance services will let you tap your paycheck early for a small fee.
Family/Friends. Embarrassing? Sure. But borrowing from those who care about you rather than a lender who wants to charge you 400% APR is a small price to pay.
Side hustle. Hustle through apps like Uber, DoorDash, TaskRabbit, Rover, etc. and you may earn the money faster than you think.
Tips to Help You Choose a Lender
Decided a short-term loan is your best option? When searching for a legitimate, reputable lender, consider the following tips:
Research licensing. Check your state’s financial regulatory website to ensure the lender is registered with the appropriate government agency.
Compare total costs. Focus less on interest rates and more on the total repayment amount, including all fees.
Read reviews. Check the Better Business Bureau and other online resources to learn how other customers were treated.
Understand all terms completely. Know precisely when payment is due, how much you’ll owe, and consequences of nonpayment.
Have an exit strategy before borrowing. Before you take the plunge, be certain that you have a rock-solid plan to repay the loan without refinancing.
When searching for reputable lenders, short-term loan services that help you find installment loans with transparent terms and competitive rates can save you time and money in your search.
Debt Cycle Trap: What No One Tells You
Guys, here’s the real talk no one wants to discuss…
The truth is that the majority of short-term lenders don’t care if you default. They’re literally banking on you failing.
Because if you fail to repay on time and then roll over the loan for another fee, or default entirely, they win twice.
Profits from customers who can’t pay are how the company actually funds itself and pays back its own lenders.
Which results in a vicious “debt cycle trap.” Borrow $300, can’t repay, roll over for another fee. Roll over, another fee. And again. And again.
Before long, you’ve paid $500 in fees and still owe $300. That, my friends, is financial slavery.
The solution? Only borrow what you know you can repay on the original due date, no exceptions. If you don’t know that 100% then don’t borrow.
Borrow Wisely, If You Must
Researched, compared, and decided to go forward with a short-term loan? Follow these rules to the letter:
- Borrow only the minimum amount required
- Opt for the shortest term possible
- Budget for repayment before you use the money
- Set up automatic payments to avoid late fees
- Resist the temptation to roll over/borrow again ASAP after paying off
Financial Resilience: The Best Defense
The best way to insulate yourself from the need for short-term loans? Financial resilience:
Start an emergency fund, even $25 per month. Build side hustles. Improve your credit score so you’re eligible for better loan terms in a pinch.
The steps to true financial independence take time. But they’re your path to freedom.
Final Thoughts
Short-term loan services can be a convenient financial tool when you need cash fast. But they also come with huge risks that can threaten your financial well-being for months or years to come.
The key to using short-term loans responsibly is knowing what you’re signing up for before you sign. Do the math, weigh your options, and have a concrete plan to pay it all back.
Remember, a short-term loan should solve a problem, not create a much larger one. Used wisely, they can be an effective tool. Used carelessly, they become an expensive mistake.
The choice is yours. Choose wisely.
