Short term loans get a bad press with many, because of the large interest rates they inevitably attract. But they are a very useful product for millions of people, if used correctly. So what is the correct way to use such a financial product? We examine sensible short term loan use.
Sensible Short Term Loan Use – Caution & Research
Don’t jump in would be my first and most important tip. This does not, however, negate the importance of exercising prudence. This is due to the fact that unsecured loans often have high interest rates. They are also given out on the assumption that they are required in the event of a financial emergency. Not simply for luxuries, specifically and exclusively.
So, how should one go about using a short-term loan properly? We look at how to make the best use of a short-term loan while still being cautious to avoid getting into debt.
Sensible Short Term Loan Use – Don’t Get Trapped
You should carefully consider your financial situation and how much money you will actually require. What is required when applying for any type of short-term loan. Many people fall into the trap of taking out a payday loan only to discover later that they have not factored in the cost of repayment. They must also repay not only the principal, but also the interest. They then find themselves in a predicament identical to that which they were in previous to receiving a loan.
This encourages people to take out another short-term loan to pay off their debts. And for some, this might lead to a debt cycle. This is why you should avoid taking out loan after loan and instead efficiently manage your expenses.
Borrow The Minimum Amount Possible For Your Needs
As a general rule, only take out a short-term loan to cover the amount you need to get by for that specific period of time. In recent years, the average amount asked for a payday loan in the United Kingdom was roughly £260, with almost all loans totaling less than £1000.
While it may be tempting for borrowers to borrow more money than they require in order to address multiple financial issues at once, this may prove to be more difficulty than it is worth. You should constantly keep in mind that the larger the short-term loan amount you borrow, the greater the interest rate will be.
Important Use Only
More than 53% of people who take out a payday loan utilise the money to help pay for living expenses, which is usually a good idea. Only 7% used it to buy new clothes, which most lenders urge you to avoid because apparel isn’t as important as, say, a furnace repair or an emergency payment.
Final Thoughts
Short-term loans are not free money with no strings attached, and should only be used to pay for necessities, as you will just accrue additional interest while saving to pay it back. Use the loan to help with items like damaged household appliances, food, and electricity, as well as transportation.
