Other options include lines of credit, which are extended by banks or credit unions to bridge temporary cash flow challenges, and bridge loans, which can be useful during real estate transactions when a new house has been purchased while the other property is still on the market.
Why you should avoid short-term loans
Short-term loans should be used only as a last resort to cover expenses that must be paid where you have no other alternatives.
Interest rates and fees
For just a few thousand dollars (most lenders won’t offer much more than $10,000 or $15,000 at most), the borrower could be on the hook for an APR approaching 400 percent or more.
Lenders expect their money to be paid back quickly-certainly within a year, usually in just a month or two weeks. You need to make sure you have a solid plan to pay it back within the terms of the loan because the consequences can cost you even more. If you are unable to repay the principal within the allotted terms, sizable late fees begin to accrue.
Credit score penalties
These loans may also affect your credit score, both positively and negatively. Some companies make what is called a hard inquiry on your credit, and your credit will take a slight hit for that. Additionally, if you miss a payment or don’t pay off the loan in time, your credit will also be negatively affected.
Potentially hazardous cycle
The biggest drawback to short-term loans is that often they do not adequately solve the underlying problems that cause you to need a short-term loan. In fact, with their high interest rates and fees, they often make the problem worse.
You have to pay the interest and fees to get the short-term loan, so you have less money next month, which makes it even more likely you’ll need another loan. It’s a vicious cycle that’s difficult to escape.
Alternatives to short-term loans
There are short-term loan alternatives that may work for you. While these alternatives may not work for payday loans in Hannibal everyone, you might consider one or more of the following:
- Asking friends and family: If you do borrow money from friends and family, make sure that both of you are clear on if and how the money should be repaid – otherwise the loan can damage your relationship.
- Borrowing from the equity in your home: If you have a larger emergency or one that is not urgent, and own your home, you may be able to tap into your home’s equity with a home equity loan or line of credit. These alternatives usually take a few weeks.
- Taking out a personal loan: Personal loans can be an alternative to short-term loans as well. The terms and rates that you get with a personal loan vary depending on your credit, but they’re usually much better than those of most short-term loans. Personal loans typically have a fixed repayment period over the course of a couple of years.
- Using a credit card: If your emergency can be paid with a credit card, it may be a better and cheaper option than taking out a short-term loan.
The bottom line
Although short-term loans are convenient and seem like a great way to fix a temporary problem, they come with a lot of risks. The fees and interest rates can top 400 percent and payback terms can be as little as two weeks. Missing payments will negatively affect your credit score and cost you more in late fees, penalties and interest. This can lead to a cycle of borrowing that is difficult to break out of. Research all your options before you apply for this type of loan.
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