Short-Term Loan Information
Short-term loans are widely advertised and easily available, and seem like a tempting way to get through to payday. Before you take that option, consider the risks and make sure that you know exactly what you're doing.
"Will payday ever get here?" "Why is the rent always due before the check comes?" "Where can I turn for some cash to keep the electricity on?" These are questions that circulate through the minds of thousands of Americans every week. Short-term lenders have capitalized on this dilemma, offering services that are otherwise not widely available.
Short-term loans, also known as payday loans or cash advances, provide a line of credit for employed residents of the US who are over the age of 18, but who may have a credit rating that leaves them unable to borrow from a bank. Billboards, storefronts television and internet ads promise you the instant cash you need to get through your current situation. If you're contemplating this option to help you through a financial crisis, here are some things to think about.
Short-term borrowing has become popular because it offers a variety of perceived "perks".
- The application process at a storefront or online requires only basic personal information. The market has expanded to a point where many customers can find a convenient location close to home.
- Compared to other lines of credit, short-term borrowing has fewer qualifications. Payment periods typically run for a shorter length of time and a lower amount than traditional debt, meaning some of the restrictions have been dropped. Not all borrowers will qualify, but some higher-risk borrowers will qualify for funds that would be unavailable to them at a bank.
- When banking information is provided to receive funds, an application and result can be processed online as quickly as fifteen minutes. While a storefront may take as long as 24 hours, it is still a quick turnaround.
To learn about the risks, consider the advantages you've just reviewed and think about the results. These short-term loans are so easy, so available, and so quick that borrowers may get sucked into risky borrowing practices. There is a strong connection between past behavior and future performance. If your finances are in a downward spiral, this will not provide the long-term solution you need. You may be at a high risk for defaulting and incurring a mountain of fees and an exorbitant interest rate.
Not unlike a pack of cigarettes, short-term lending sites include a warning label. When you get past the smiling face of the young man with the stack of cash or the relieved mother with her children, you will eventually find something called a "Customer Notice," usually in very small print. These notices clearly warn that short-term borrowing is only intended to cover expenses for a few days or weeks until the coming payday. It is not a financial solution; customers are well advised to seek credit counseling and to research local laws to be fully educated on risks associated with a cash advance. Furthermore, some companies go so far as to recommend that borrowers consider an alternative. Think about it...what other industry tells its potential customers to think about an alternative to using their services?
Selecting the Lender
If you have followed the advice of the lender, you've done your research, you're receiving credit counseling, you've considered alternatives and weighed the risks, and you're determined that this option is the right choice for you, here are some things you can look for as you shop for the right lender.
- By law, short-term lending agencies must post their interest rates. Rates may be posted as a percentage. More likely, the rate will be indicated at a flat fee/quantity; for instance, $15 per every $100. That rate may look reasonable if paid off quickly in full, but extending the debt at that rate may turn into a 300% interest rate over the course of a year.
Take note of whether the rate is fixed or adjustable. If there is any possibility that you will be unable to pay off the debt according to schedule, an adjustable rate can increase the amount owed substantially.
Flexibility in payment
- Can you change the payment schedule as you go? Can you make installment payments or does the agency insist on lump sum payment? Is there a penalty for paying off what you borrowed early?
- Find the "hidden" fees. Measure the likelihood that you will be assessed that fee. Calculate the cost of fees into the total cost of the short-term loan.
No risk guarantee
- Some lenders offer a no-risk guarantee. With this arrangement, the borrower has from 3-5 days to return the borrowed money in full and owe no interest or fees. Even if you know it is highly improbable that you would be able to take advantage of this feature, it speaks well of the lending agency.
- You may be more likely to repay on time if you choose a lender that you drive past every day, if you remember that the owner knows your address around the corner, and if there's a possibility you may run into the lender on your next trip to the grocery store. We tend to be more faithful in paying back people in our community. An internet option can feel less personal and more obscure, increasing the possibility of default. (Don't kid yourself. The online lenders also know where you live.)
- From Capitol Hill to the lender around the corner, the financial community is in agreement that customers who resort to short term borrowing are in need of credit counseling. Does the agency you're considering have a link to credit counseling on their website? Look around the office space of the storefront lender. Are there any flyers advertising free financial seminars in the area? Promotion of credit counseling suggests that an agency is interested in your long-term financial stability.
- Short-term borrowing is only legal in 36 states. It is not advisable to cross state lines or use internet services to secure in one of the fourteen states in which the practices are illegal.
If you've decided to apply, take it seriously. Determine to use the money as it was intended-as a one-time solution for an emergency situation. Be grateful for the availability, and look forward to celebrating your full repayment in the coming days.
Be conscious of changing state and federal regulations. Short-term loans may soon be restricted to what borrowers are reasonably able to repay instead of what lenders anticipate they will be able to collect. To stay keep an eye on changes to the regulations you can visit the Consumer Financial Protection Bureau
or the Federal Deposit Insurance Corporation