When you have a money emergency, it’s not uncommon to turn to a short-term loan for assistance. Unfortunately, some borrowers misuse these loans, causing situations that are bleaker than the original emergency. Before you decide that a short-term loan is the answer to your problem, you need to know what not to do. Here are five common mistakes that people make when taking out these small loans:
1.Taking Too Much
Short-term loans are fairly easy to obtain. Most loans require a minimal income, a checking account and very little, if any, paperwork. One of the biggest mistakes that people make is to take more money than they need. For instance, a person may need £150 to cover an emergency, but he may qualify for £500 when applying for a short-term loan. Rather than only taking what he needs, this person accepts the entire £500. Remember that when taking a loan, you will have to pay fees on the amount you accept. As the amount that you accept rises, so do the fees you will be required to pay.
2.Failing to Consider the Fees
Most companies that offer short-term loans are up front about the fees that they charge. Unfortunately, many people fail to take these fees into account when budgeting for repayment. Take, for example, a short-term loan in the amount of £500. Depending on the fees that are charged, you may be required to pay back £750 or more. If you don’t take these fees into account, you may find yourself unable to pay the money back when it comes due.
3.Extending the Loan
When consumers fail to consider the fees involved with short-term loans, they often find it necessary to extend the loan’s terms. When terms are extended, not only will you pay a fee for the privilege of extending your loan, but you may be subject to other fees as well. Before you extend the loan, make sure that you are clear on exactly what expenses are involved. It may be a better idea to borrow the money for payment from a friend of family member if possible.
Short-term loans are meant to get you through an emergency. They are not meant to give you spending money for your holiday, give you a way to buy a new bag, or for any other frivolous reason. While it can be nice to have the money in your wallet, if you don’t have extra money to spend, you won’t have extra money to pay back a short-term loan. Short-term loans are best used by those people living paycheck-to-paycheck who need cash for an emergency before their next pay date. Car breakdowns, utility shut-offs and medical treatments are all perfect reasons for a short-term loan; trips to the shops and nights out with friends are not.
5.Borrowing to Pay
It’s not unusual for people to get stuck in a vicious cycle of debt by utilizing short-term loans. Because they are quite simple to get, some people will take a second short-term loan to pay the first. When they can’t pay the second, they take a third, and so on. It’s incredibly important that you are aware of the entire amount of money that you will owe before you take on a short-term loan if you hope to avoid this cycle.
Short-term loans are an excellent option for people experiencing true emergencies. If you think that a short-term loan is right for you, be sure to avoid the pitfalls above. While these loans can work well for those who utilize them wisely, they can be the financial ruin of people that don’t.
Lizzie Godding is a financial blogger in the UK. If you need a little cash before your next paycheck, check out http://shorttermloans.org.uk.