If you are short on cash or behind on your bills, a quick infusion of cash in the form of a short-term loan can be appealing. However, short-term loans come with many disadvantages, which can often outweigh the benefits.
Short-term loans are loans you can get quickly, usually the same day. They require little paperwork, and most don’t require a credit check or proof of income. The most common types of these loans are payday loans and cash advances on credit cards.
Cash advances are about the simplest short-term loans you can get. You simply use your card at an ATM and withdraw cash as you would with a debit card, up to the limit your card allows.
Payday loans aren’t quite as easy to get, but they are a good option for people who don’t have a credit card. Most cities of any size have payday lenders, and other businesses, including convenience stores and grocery stores, may offer payday lending but no one offers any freebies. To get a payday loan, you simply provide a post-dated check for the amount of the loan plus any fees.
Though cash advances and payday loans allow you to get cash quickly and may be appealing if you are short of the money needed to pay your rent or your car payment, they are very expensive to get.
For example, the average fee for a credit card cash advance is anywhere from two to four percent of the amount. That means if you take out $500, it can cost you $10 to $20. Many credit card companies also charge higher interest rates on cash advances than they do on purchases. So if you don’t pay that money back before your grace period ends, you could wind up paying 20 to 25 percent interest on it.
The fees on payday loans are even worse. The industry standard is $15 for every $100 borrowed, so if you take out that same $500 in a payday loan, it may cost you $75. That’s an annual percentage rate of 390 percent. And some states allow payday lenders to charge even higher fees.
Because of the high fees, you should try to avoid payday loans and credit card cash advances.
The easiest way to do this is not to get into financial trouble in the first place. Don’t spend beyond your means, and only use credit cards to pay for everyday items you would buy anyway.
However, people don’t always get into financial stress because of bad decisions. A medical crisis or expensive car repairs could put you in a financial bind. But there are options other than short-term loans.
If you don’t need the cash immediately, you might try to get a personal loan. These carry high interest rates, but they are still lower than payday loan rates and credit card interest rates. You need good credit and have to have proof that you can repay. Banks and credit unions are good places to find personal loans.
If you have a 401k plan or whole life insurance policy, you might also look into taking loans from these. You’ll pay much lower interest rates, and the interest you do pay is being paid back to yourself.
If your credit isn’t good enough to get a personal loan and you don’t have a 401k or insurance policy from which to borrow, there are other ways to come up with cash quickly. You can always try to sell some of your possessions or you could also sell plasma. Another option is to see if you can work out a payment plan with the creditor to which you owe money.
Just about any option is preferable to taking out a short-term loan.