Managing The Unexpected

Finding the right loan for you

personal-loansThe ways to financial woes are both numerous and swift. It is not uncommon for the average American to experience an unforeseen expense that they may have difficulty dealing with – these circumstances can range from an untimely accident or illness to an unexpected car or home repair bill, or perhaps an unforeseen computer issue. The list goes on.

By the same token, the ways out of a short-term financial predicament are limited: one can borrow money from a relative or friend, find a way to increase their income. While the latter two options can potentially help in the short term, the first option is usually the fastest way to fund a financial shortfall.

For some, turning to their bank to obtain an unsecured line of credit at a reasonable rate of interest with flexible terms that allows borrowed money to be paid back over time may be an option. Another potential alternative is to get a line of credit secured against an asset – like your home or car – secured lending generally offers a lower interest rate and provides for more flexible repayment terms than an unsecured financial product.

However, for many who lack credit history or have bad credit, these options simply aren't options. Many banks will not lend to a potential borrower who doesn't own sufficient assets (such as a home or a car), has experienced issues paying bills on time or has taken on too much debt.

This is where payday loans and other short-term loans may be a viable option. Generally available almost instantly to anyone meeting certain minimum age, income and state of residence requirements, payday and installment loans are a fast and convenient way to borrow relatively small amounts of money to cover off unexpected expenses – typically without the caveat of deep-dive credit checks.

Even for those with access to other short-term loan options, a payday or installment loan can still be a good option to consider, particularly for one-off unexpected costs like repairing or replacing an appliance or dealing with a sudden health emergency.

For starters, it's important to know the differences between a payday loan and an installment loan. In simple terms, a payday loan is a relatively small loan, usually no more than $1000 that typically is to be repaid when the borrower receives their next paycheck.

Payday loans are beneficial to those with a specific emergency or other type of expense they need to cover as soon as possible, as it basically provides the borrower with an advance on their next paycheck to alleviate a short term financial bind. Those who can afford to repay the entire amount borrowed along with interest all at once often prefer payday loans over other loan options because the quick, one-time repayment nature of the loan means they will only stay in debt for a short period of time.

An installment loan is a loan repaid over time with a set number of scheduled payments, with fees and, depending on the lender, interest and other charges. Lenders must always disclose the associated annual percentage rate, or APR of such loans. The structure of an installment loan provides a bit more breathing room to those who may not be able to – or may not want to – pay back a lump sum right away. The term of an installment loan can be as short as a few months or as long as several years.

While installment loans can be useful in covering off unexpected emergencies, because they have longer terms than payday loans, they may be a viable alternative for other expenses, planned or otherwise, such as extra costs associated with a wedding or a trip that's coming up sooner than you have time to save for.

While borrowers will have to make multiple periodic payments on time with interest and potentially other charges, an installment loan payment typically leaves more of the borrower's paycheck available to them for other things.

Both payday and installment loans are popular options for those who need access to money due to an emergency or unexpected expense. While they generally charge more interest, the speed and efficiency of obtaining cash quickly justifies the cost in the minds of many.

There are several things to bear in mind when applying for a short-term loan such as a payday or installment loan:

  • Compare your options. There are many options available when it comes to getting a payday or installment loan, so it's important to compare them to find the one that best fits your needs. Look at the loan amount, features, the APR, and how quickly the loan is expected to be repaid to ensure the loan matches your needs

  • Review the eligibility criteria. While lenders may still accept applications if you have bad credit history, they still have criteria that will need to be met. Check the minimum age, income and residency requirements as well as the loan amount and terms that are offered. Also, each state has its own rules and requirements, so be sure to check where the lender is licensed.

  • Only apply for how much you need and can afford. Lenders shouldn't offer you a loan larger than they think you can afford, but you should still work out what repayments you can manage and check that it makes sense for you to accept the terms offered in your circumstances. Only apply for a loan with repayment terms that will work for you. No matter what type of loan you apply for, it is important that you budget in advance to ensure you can afford to pay it back on time.

  • Budget to cover your repayments. When you are approved for a payday or installment loan as described here, your repayments will generally start on your next payday, so make sure your budget considers the amounts of your repayments. Just as it is easy to forget you still need to pay for a purchase you made on a credit card until you get the bill, it is easy to forget that you need to repay your short-term loan before your payments are due. If you can't cover off your monthly needs and the loan payment, you should explore other options.

Payday and installment loans aren't the answer for everyone. If you find yourself in a situation where you need access to a little bit of extra money on an ongoing basis, for example, if you are renovating your home, then it is best to consider longer term options such as a personal line of credit. Generally, a line of credit offers more flexibility and saves the time of applying for a short-term loan each time you need some extra money.

Don't forget that aside from your immediate financial needs, you also need to think long term and manage your credit score. While there are many different criteria that may affect an individual's credit score and financial health, experts recommend a few key things that one should consider for long term financial health: focus on how much debt you carry relative to your income, how much interest and other charges you are paying on your purchases, and ensure you make your payments on or before they are due.

While few people have a perfect credit score, those with good credit scores generally pay their credit card balances in full each month, make their other payments on time and don't have too many credit cards at the same time. If you owe money on many different credit cards, pay high rates of interest and struggle with the monthly payments, talk to a credit specialist and/or financial advisor to see if there's a way to consolidate your high-interest and difficult-to-manage debts.

Always only spend what you can afford. While those shoes may seem like a bargain, paying 20% or higher interest on them is going to make your purchase expensive and not such a great deal in the long run.

Keep in mind that you should make all payments on necessary expenses like rent, car loans and medical bills on time – not paying on time and/or not paying at all can affect your credit score, making it even more difficult to get a longer-term loan with better and more flexible terms.

It all comes back to understanding your situation and finding the best option available for you. Always remember to borrow responsibly and ask questions if and/or when you are unsure of how to access or repay your loan. When it comes to short-term loans, the key is to do your research to ensure it's the best fit for your situation.

Additional Resources:

MoneyKey Frequently Asked Questions: https://www.moneykey.com/questions-general.php

MoneyKey Homepage: https://www.moneykey.com

How MoneyKey Works: : https://www.moneykey.com/how-it-works.php

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