One of your top financial goals should be living within your means such that you do not need to take out any loans. However, some emergencies and opportunities require that you take short-term loans. The application process of short-terms loans is in most cases fast. However, lenders charge higher interest rates for the loans. You need to compare rates from different lenders to reduce the cost. Determine if the lender charges any original fee or service fee because it increases the cost of the loan. Here are additional tips to consider when applying for a short-term loan.
1. Borrow What You Need
You need to borrow responsibly to maintain a high credit score or improve a low score. Avoid borrowing more than you need even if you qualify for it. Lenders will push you to borrow the highest amount possible and will sometimes try to give you incentives to sweeten the pot. Do not fall for the marketing tactics. Instead, determine the exact amount you need beforehand and stick to it no matter what.
Limit borrowing short-term loans to solving emergencies and honour the repayments. Not honouring your payments will only worsen your credit score and limit your ability to get financing in the future. It will also expose you to higher interest rates, which will complicate issues even further.
Your income should cover your recurring expenses and the monthly payments. If you are always borrowing to pay your monthly expenses, consider changing your lifestyle and making some adjustments. You may need to cut some expenses, including your rent, to eliminate the reliance on loans.
2. Pay within the Shortest Time Possible
You can incur a lower interest charge when you repay a loan before the expiry date. Lenders give different repayment periods depending on your level of income. Use a loan calculator to determine the interest rate you will incur with different repayment periods. Go for the shortest period depending on the monthly repayments. A loan calculator helps you to determine the amount you will pay every month, including the interest charges. If you want to see an example of a loan calculator, you can find a great one at https://www.118118money.com/money-guidance/financial-tools/loan-calculator/.
However, in some cases, spreading the payments over a longer period may make them more manageable for you. If the extra interest is worth the lower payments, this could be a better solution for you.
3. Consider Alternatives to Short-Term Loans
Most people run to banks or other financial institutions like credit unions when they need a quick loan. Institutions are reliable but their interest rates are high. Consider asking for a loan from a friend or family member instead of borrowing from an institution. The individual may give you the full amount you need without charging any interest. If you need a payday loan, you can avoid the high interest charged by asking for a pay advance from your employer. If your income is not enough to save for emergencies, consider getting alternative sources of income. You may have to work more hours, but higher income will eliminate the need for high-interest loans.
4. Refinance High-Interest Loans
One of the disadvantages of short-term loans is the interest. Some lenders will not tell you about their rates when advertising their loans. However, you can determine the difference in rates when using a loan calculator. If you are already repaying a short-term loan, you can refinance into a low-interest rate. For instance, you can use a home equity line of credit to pay off the short-term loan. You will get a longer repayment period and a lower interest rate by refinancing through home equity.
5. Avoid Applying for Multiple Loans
Many borrowers fall into the trap of borrowing multiple short-term loans and up in a borrowing spiral. Lenders make money from loans and hence, they will always give you reasons why you need another loan. You may end up taking several loans for consumption even when you have no urgent needs. We have already mentioned the high-interest rates charged on short-term loans. Applying for multiple loans means that you will incur a high cost on their interest and service charges. If you must apply for a loan, get one that covers all your urgent needs from one lender. Remember to pay for it within the shortest time possible to lower the interest charge.
A short-term loan offers a quick way to solve a financial emergency. However, the convenience often comes at a high cost in terms of the interest rate charged. Determine the total interest and fees charged before accepting an offer for a short-term loan. Borrow what you need and be committed to repaying the amount on time. You can lower the interest charged by repaying the loan faster or refinancing it into a lower interest loan. A lifestyle change may be necessary if you rely on short-term loans to meet your expenses all year round.