Short Term Personal Loans: Risks and Dangers
High Interest Rates
A majority of short term personal loans do not require borrowers to put up collateral to back up the loan. In lieu of collateral, the borrower receives a loan with a limited amount of money (e.g. $5,000) at a much higher interest rate than other loans that involve less risk for the bank.
Another reason that short term personal loans have high interest rates is because they are just that: short term. Since borrowers have a shorter time frame to repay the loan, banks must raise interest rates so that they can make money on the loan. The shorter the payback term, the higher the interest rate. Talk with your bank about getting the shortest term that suits your budget.
To avoid the wrath of high rates, simply make loan payments on-time and in-full. The sooner you pay off the loan, the better.
Excessive Fees & Penalties
Short term personal loans generally have more fees and penalties than other, long-term loans. Lenders try to make as much money they can, and if they know you're in a tight financial situation and need cash quickly, they might make you pay for it. Be sure to choose a lender that knows your financial history and track record. You're more likely to receive better terms and fewer fees if you deal with a bank that knows you.
Short term personal loans carry a higher risk than other types of loans. Since there are fewer eligibility requirements, including no credit checks, co-signers, or collateral, most of the risk associated with short term personal loans is with the lender. They have nothing to repossess if the borrower cannot make payments. Their risk, however, translates into risk for the borrower as well; elevated interest rates, fees, and penalties can quickly add up.
Don't Dig Yourself into a Bigger Hole
Many people seek short term personal loans to help pay for necessary or unexpected costs, such as home or auto repair, medical bills, or business expenses. Only pursue a short term personal loan if you have the financial means to repay it quickly and on-time. Because these loans have high interest rates, you can quickly find yourself in even more debt than you started out with. Though there are certain life situations that require quick cash, it is in your best interest to pursue other options before relying on short term personal loans, if you don't think you can satisfy the repayment terms.