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14 Do’s and Don’ts of Short-Term Loans

Short-term loans, also known as cash advances, can be a quick and simple way to get access to funds on short notice.  Millions of Americans find this form of credit helpful, but it is expensive and should be used responsibly. Abusing these types of loans can leave you in a poor financial situation that might be difficult to get out of. To avoid such a scenario, here are 7 habits to avoid, and 7 others that will help you to manage your short-term loan as a temporary cash flow solution.

1. Don’t take more than you need

Short-term high-interest loans are not a solution for long-term financial health. These loans may be useful during a temporary cash shortfall and you need money fast. If you take out a loan, make sure you only borrow the amount you require. Although you may qualify for up to $1000, if you only need $600, it’s in your best interest to only take $600.  Otherwise, you may end up spending the extra cash on unnecessary things and will only rack up more interest and fees.

2. Don’t only make minimum payments

Minimum payments are the lowest required payment for your loan to keep your account with the lender in good standing. These payments may be comprised only of interest or make only a very small contribution towards your outstanding principal.  If you have available funds, ideally you should make additional payments towards your principal. Making the minimum payment makes the most sense when you truly cannot afford to pay more. Don’t make a habit of it, as months will go by and you’ll be left wondering why you still owe the lender a significant amount of money.

3. Don’t use a loan to pay off another loan

Loan cycling is the term used to describe the routine of using loans to pay off existing loans. Loan cycling is a dangerous habit as consumers will seldom have enough money to cover the interest incurred through the term of their loan. Once caught in a cycle of high-interest debt, it is difficult to get out. This is because often a so much of your payment is going towards interest, rather than reducing the principal. Consider other lower cost options before taking out a high-interest loan to repay an existing loan. If you are having significant financial trouble and need professional assistance, contact the National Foundation for Credit Counseling.

4. Don’t take out a short-term personal loan unless you really need it

One of the keys to getting the most out of the borrowing process is to go about it responsibly. But what does this even look like? Well, what it doesn’t involve is taking out short-term loans online so you can go on a shopping spree, or take a luxury vacation. This type of borrowing can get you in serious financial trouble.

When you’re taking out a short-term personal loan, you should be doing it to pay for an unexpected emergency expense. This can include things like:

  • Unexpected medical bills
  • Paying for an unexpected auto repair that puts you in danger of missing work
  • Unexpected and urgent household repairs

Make sure that when apply for short-term loans, it’s for the right reasons and it’s a responsible use of that product.

Another important component of responsible borrowing is how you handle offers from lenders. If you’ve applied to multiple lenders and have received several offers, you’ll need to evaluate these lenders thoroughly. You may find that some lenders may be putting on the pressure for you to accept your offer. Make sure to be firm and explore these different options before committing to one.

5. Don’t ignore how long the lender has been in business

If you’re evaluating different lenders and you come across one that’s completely new, you may want to review them a little more closely. Lenders that have been around a while will generally have a firm base of clients who they’ve managed to hold on to for a reason. This means that other people have likely vetted the company to some degree, and that enough people are happy with their services to keep them in business. This doesn’t mean that if you come across a new lender that you should immediately dismiss them. It just means that you’ll need to be incredibly thorough when you evaluate them, and look through their terms, conditions, and practices closely.

6. Don’t lose hope if you have poor credit

Finding short-term loans can be tough when you have bad credit. Maybe you go from bank to bank looking for some financial relief, and are continuously met with the same reasons for rejection about how your credit score is too low to get a loan online with them. But if this sounds like you, it’s not time to give up!

There are some lenders out there, like MoneyKey, that weigh a number of factors other than your credit score when evaluating you as a borrower.

To have the opportunity to qualify for a personal loan with MoneyKey, you must:

  • Be of legal age to contract in your state
  • Be a US citizen or permanent resident
  • Be a resident in the state where our product is offered
  • Have an active bank account
  • Have a regular source of income
  • Have a valid contact number and an active email address

7. Don’t take out short-term loans in secret

A lot of people run into a sticky financial situation from time to time, whether it’s an unexpected car repair that your savings can’t cover, or a household repair you hadn’t budgeted for. If you have other people in your life that you share finances with, like a spouse, you need to keep them informed of any financial trouble you may have run into. Keeping people in the dark likely won’t help the situation, and if things go even further south, you’ll need to keep the people who are implicated in the loop.

8. Do budget ahead of time

Before you apply for a short-term loan, think about whether you would need the loan if it was payday. If the answer is no, this would mean that you should be able to repay a significant portion of your loan on your next payday. Ideally, you should aim to repay your outstanding loan as soon as possible. Do the math and consider the financial impact of your decisions. For example, would you rather make 3 payments of $180 or 10 payments of $85? Choosing the latter will cost you over $300 more and extend your loan term by months. Think about what you can afford and budget to pay off your loan in a timely fashion. 

9. Do pay as soon as possible

Before taking out a loan you will want to make sure that there are no penalties for paying off your loan early. With the exception of Payday Loans, other forms of short-term credit like Installment Loans have longer loan terms. Open-end forms of credit such as Lines of Credit may not have set repayment amounts, but you should repay as soon as you can to minimize the cost to you. The longer your loan term or the longer you carry a balance with the lender, the more interest and/or fees you will pay over the term of the loan. It may feel more expensive to pay off your entire loan at once but it can save you money in the long run.

10. Do understand the terms and conditions

When people are in a rush, they tend to do things like forget their passport on the way to the airport or leave their coffee mug on the roof of their car. If you’re going through an emergency or a stressful time when you’re taking out a short-term emergency loan online, it’s easy to miss important details or skip over vital information. Formal loan documents may be long and filled with legal jargon, but it is important to read the document to understand your loan terms. Be sure to also read your lender’s plain language Rates & Terms and FAQ pages for your state and loan product to understand how your loan will work. Call the lender and ask as many questions as you feel necessary before taking out the loan. If you’re ready to apply for a short-term loan, keep these points in mind to avoid a financial headache down the road!

11. Do look at multiple lenders

If you’re looking for short term loans online, one of the benefits is the ease at which you can quickly browse the web to find different lenders. You can use a loan-matching or look for online direct lenders on your own, but either way, the process of finding multiple offers online may be easier and quicker than finding multiple offers from banks.

The benefit of fielding multiple offers is that you may have an easier time finding a loan that’s more suited to your specific financial situation. If you do manage to get more than one offer for a short-term personal loan, make sure you thoroughly evaluate the rates and terms of the loan as well as the lender themselves. 

12. Do look at customer reviews on lenders

Whenever you’re taking out a short-term installment loans – or working with any company for that matter – it’s good to know what previous customers think about the company you’re thinking of working with. So how do you see this? Well, it starts with looking for online reviews. Online lenders in particular may have a significant number of customer reviews online for you to look through. Start your search on Trustpilot and see if your lender has a presence there.

While you shouldn’t take any single review of a company as gospel, if a lender has a big enough presence online, you may be able to get a general sense of how people feel about them and what areas they excel or fall short in.

13. Do remember that loans have interest and fees attached to them

When you’re in a financial bind and get an offer for a personal loan online that could help you out, you might be tempted to grasp on to this life raft without thinking about everything that goes along with it. It’s important to remember that unsecured short-term loans often come with high fees and interest rates that you’ll need to pay. It’s important that you make sure you understand what these fees will be before you accept the loan offer, and make sure you’ll have the ability to pay them off.

14. Do leave room in your budget for savings

There are times when the need to take out a short-term personal loan may feel unavoidable. Maybe your water heater has broken down, or you drove over a nail and need to replace a tire. If things like this pop up and you don’t have the money to deal with them, then short-term loans online may be able to help. But what do you do to avoid taking out a loan when something like this happens in the future?

One of the few ways to prepare for an emergency that you can’t anticipate is to start setting aside money in an emergency fund every month. If money is tight, this made sound easier said than done. But if you can manage to save any of your income by months end, but this money aside. If you can manage to build up your emergency fund, you may have enough money set aside to avoid taking out a short-term loan the next time an unexpected emergency expense pops up.

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