6 Do’s and Don’ts of Short-Term Loans

Short-term loan checklist

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 3 habits to avoid, and 3 others that will help you to manage your short-term loan as a temporary cash flow solution.

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 quick access to funds. 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.

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. 

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.

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.

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.

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 loan, 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!

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