The Issue with Short Term Loans: Evaluating your Options in a Difficult Economy

While periods of recession and widespread austerity can be extremely difficult to navigate, the subsequent recoveries are often even more challenging. There are several reasons for this, with one of the most prominent being that citizens are often left in a state of limbo once an economic recession has ended, as they balance multiple debts against the need to maintain an existing standard of living. There is an also expectation that things should improve once the recovery is underway, but the fact remains that it can be a long, difficult and arduous process.

The Emergence of Short Term Loans: Calculating if they are Right for you

The attitude of lenders also changes after a recession, while new and innovative financial products are also developed to suit the wider market needs. Take the recent recession, for example, which triggered the rise to prominence of short term lending and the so-called ‘payday’ loan. This type of financial agreement allows the applicant to apply for a small, unsecured sum of money, which must then be repaid within an agreed 4 week period. While it remains one of the largest growth industries in the UK, this lending option should be treated with extreme caution by consumers if they are to remain solvent and rebuild their credit. Consider the following: -

• The Need to Avoid Cyclical Debt: Payday loans have become synonymous with recurring, cyclical debt, as consumers often misunderstand the premise of the loan and its core purpose. Its short term nature means that it should only ever be considered to repay a one-off and unexpected monthly expense, such as the breakdown of a car or medical costs. If you apply for a payday loan to supplement your existing income or to help maintain a certain standard of living, you may well end up applying for regular loans that trap you in a cycle of high interest and ultimately unmanageable debt.

• The Burden of High Interest Rates: Perhaps the biggest criticism leveled at payday loan companies is that they lend money at an exceptionally high rate of interest. With some lenders applying rates of more than 4000% to each transaction, applicants are forced to pay considerably more than they borrowed in the first instance. While this may not be an issue as a one off charge, those who fall into the trap of applying for loans on a monthly basis will soon find their liability soaring to an unmanageable level. This must be avoided at all costs, especially if you are looking to rebuild your credit score after a recession.

• The Market Alternatives: If you are faced with a situation where you need to borrow money, it is crucial that you appraise all of your options as a consumer. While you may not have the leverage or credit to apply for a secured loan, for example, there are additional forms of short-term lending that are far more suitable for consumers. So rather than commit to a payday loan, you may wish to apply for an unsecured personal loan that can be rapid over 3-6 months. While there is still a limit on how much you can borrow, you will have the option to repay in installments while also accessing considerably lower rates of interest.

The Last Word

For the typical consumer, a period of economic recovery often provides considerable financial challenges. While short term lending may provide an effective temporary solution, however, it is important to consider your options carefully before making a firm financial commitment.