Understanding the terms associated with short-term loans

Life tends to throw unexpected events at us. When an emergency or other unforeseen expense occurs, sometimes your bank account can’t accommodate your financial need. Although sometimes consumers feel ashamed in seeking a short-term loan or cash advance to make ends meet, it’s a common occurrence. Consumers who need immediate access to cash to tide them over will find there are a few short-term loan options.

Short-term loan options

Before taking on a short-term loan, it’s important borrowers understand the terms of any loan to make the best decision for their situation.

Short-term personal loans: These typically come with a fixed interest rate and a fixed repayment period. Lenders usually check credit scores, which means this inquiry can slightly lower it. Depending on the borrower’s credit score, the loan may require collateral or be offered at a high-interest rate.

Cash advance: People might take a cash advance out on their credit card as a short-term cash solution. This is easy access to cash, but expensive due to cash advance fees (from credit card company) and ATM fees (the bank where the money is accessed). Banks also charge higher interest rates for cash advances than they do for straight credit card purchases, and interest begins to accrue immediately.

Payday loans: These loans are usually for small amounts and lenders do not check credit. Borrowers are required to have a bank or credit union account (or a prepaid debit card), valid ID, proof of income, and be 18 years or older. Loans usually come with high fees and interest rates, some of which are considered to be “predatory” (they average about  400% APR, and can go as high as 700%).

Payday lending is governed under state – not federal – law, so consumers will find interest/fee caps vary. Many states are strict with what lenders can charge short-term borrowers in interest, some states put a few restrictions, and others prohibit the practice entirely.

Do’s and don’ts of short-term loans

It's a good idea to always shop around to see what different lenders can offer. Before accepting any loan’s terms, be sure to budget enough money to make payments so existing debt doesn’t snowball into something completely unaffordable. Make more than the minimum payment and plan to pay down the loan ASAP.

Never borrow more than is needed and don’t borrow money to pay down a different loan (borrowers end up being charged interest for both). Since these high-interest loans are costly, only use them to pay for necessities such as medical bills or urgent household and automobile repairs.

Always read the fine print

If you’ve found yourself in a position where you need a short-term loan, it’s a good idea to be cautious. Before you agree to any type of short-term loan, always read the fine print so you aren’t given any unexpected surprises that might hurt you financially.

According to the American Economic Statistics Office, for 77% of Americans living paycheck to paycheck, a sudden cash crunch can create a difficult financial situation. If you find yourself in a position where your credit standing is at risk, PRBC can help. To learn more about our alternative credit score program, contact us today.

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