Federal Financial Insights
July 20th •
Do you need money—fast—for a personal emergency? Before you ask your family for some cash, consider applying for a short-term loan.
This type of loan isn’t for everyone or every situation, though. Let’s take a look at why you should (or shouldn’t) pick up a short-term loan.
Besides borrowing money from a friend or getting an absurdly expensive cash advance from your credit card, there’s really no other way to get a same-day direct deposit of funds besides a short-term loan.
Traditional loans can take weeks of approvals and stacks of paperwork—short-term loans are usually disbursed on the same day you apply, and can be used as for emergencies ranging from hospitalizations to car repairs.
Many of these loans have a repayment period of 2 weeks—or until your next payday. But if that’s not enough for you, lenders can offer longer periods to fit your budget and needs.
In most cases, all you’ll need for short-term loan eligibility is an active checking account and proof of employment (some loans require collateral).
Collateral-based loans (where you offer an asset, such as a car or jewelry as insurance in case you can’t repay the lender) are generally more favorable than with long-term loans, meaning the item put up as collateral can give you a higher loan offer than usual.
They’re gentle on your credit history
Even if your credit isn’t great and you think you’ll never get a loan, you’re probably still eligible for a short-term loan.
In fact, smartly repaying these kinds of loans can be a first step in rebuilding poor credit.
They have high interest rates
The reason you can get a short-term loan so quickly is simple—lenders hope, even count on you not paying the loan back on time.
Sure, you can get a quick pick-me-up for $500 this week, but that comes with a hefty interest rate similar to those of credit cards (often in excess of 15%).
They can be habit-forming
The problem with high interest rates only surfaces when your short-term financial hardship lasts longer than you expected.
All of a sudden, your get-out-of-jail-free card turns into a pair of handcuffs, and you’re forced to take out yet another loan to help pay the fees on the LAST loan…and so on.
You’re stuck in a vicious circle, borrowing money from family here, taking out a loan there…and when you finally pay off the loan, you’ve spent perhaps triple the loan’s cost in late fees and interest.
They are a last resort
Lenders primarily market short-term loans to people who have been irresponsible with money. Yes, they can be a lifesaver if you suddenly run into an emergency. But if you’re already in debt and want to take out half a grand for a new TV, your lender is going to put you through the wringer.