Comprehending the Risks of Short Term Loans

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Published on May 18th, 2015 | by Joan Makai

According to a short term loan is a loan that can be repaid in less than a year or something with a maturity of one to five years. Short term loan is not a new concept in the world of Finance. It has been with us since time immemorial and will continue to be there as long as we’re living.

This kind of loan pops up whenever one is in need of quick cash to pay-off an emergency or unexpected expense. During the global recession in 2008 short-term loan became widespread. Millions of people across the globe have been affected so badly by this economic crisis that many turn to different kinds of alternatives to get quick money for their family and hopefully turn their lives around and one of those alternatives is taking short-term loans.

As quick as it could give you money and provide immediate solution to your problem, companies and individuals offering short-term loans are no saints. They take advantage of the need that drives people to bite to what they will offer. We’re not saying that you have to steer clear from it. You have to realize though that suffering even more, both financially and emotionally, after getting this kind of loan is not unheard of. It has happened and it is continuing to happen to some households and businesses.

But you can protect yourself better if you are aware of the different risks of getting short term loans. Here are some of those:

  1. Short Term Loans Have Steep Interest Rates

For those who are not too familiar about how this works, let us illustrate it in the simplest way we could. If you borrowed $100 from your friend, you’ll pay that whole thing back in the set due date.

But banks earn from interest. So they will charge you 5% interest per day (for example) and tell you to pay the whole thing in a week (say $20 a day). The $100 you borrowed will then be equivalent to $115 once you have paid them back in full.

Bad News: Monthly interest rates for short term loans are generally way higher than long term ones.

  1. Short Term Loans are Often Secured

Banks know that people going for this loan usually don’t have other options anymore. To make sure they get their money back, you’ll have to sign something up as collateral – your car, your home, or whatever has worth. So take care of paying your debts on time or you might lose it all.

  1. The Downward Spiral to Bankruptcy

Worse News: Remember that banks and other lending agencies check an individual’s credibility when it comes to borrowing money and paying for it. If you have low rating, you get an even higher interest rate.

If you’re a business and you know you’ll get the money back some time soon, go for this. If you plan to pay off your old debts with this, re-think it. You’ll be in a shoddier position than where you started when you were thinking of signing up for this loan.

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Joan Makai

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