Short term loans on the surface are a reasonable way to get yourself out of a financial bind; however, there are pitfalls and dangers to watch out for if you find yourself depending on them regularly. Finances play a huge role in your business as well as your personal life, managing them efficiently is a responsibility that can get a little tricky at times. If you are currently considering taking out a short term loan for the first time, or again, continue to read, you should consider this information before making your final decision.
Short Term Loans; What You Are Really Paying
At a glance, the interest you are required to pay back with a short term loan may seem huge, however, if you sit down and take the time to do the maths you will see a very different picture. On the surface, if you take out a short-term loan for £100 you may see an interest rate of over 1000%. If you look at the actual cost and the rules short-term lenders have to abide by, then you see a different picture. £100 over 30 days will cost a maximum of £124. This is because all lenders are regulated by the Financial Conduct Authority and can not charge more than 0.8% interest per day. Every lender will show you exactly how much you have to pay including how much the interest will be. They will also let you know the amount they charge if you are late with repayment. The most a lender can charge is £15 and the maximum you can repay with added interest and charges is double what you borrow. So if you borrow £100, you will not have to pay more than £200 including interest and charges.
Falling into Bad Habits
As stated earlier, a short term loan is not such a bad thing if you use it once or twice to get yourself out of a rare fix. If you find that you are turning more and more to the quick loan solution to get you out of hot water then you need to look at your finances to see what is going on. It makes more financial sense to evaluate where your money flow issues are coming from and rectifying it, than falling into an endless cycle of fast cash that will only help you lose more money in the long run.
Taking out a logbook loan is another way to take out a short-term loan. Logbook loans are loans secured on your vehicle, so the lender owns your vehicle until you pay the loan back. You can keep on using your vehicle as long as you repay the loan. However, they are expensive and risky and you should avoid them if you can. You can normally borrow from £500 up to £50,000, depending on the value of the car. Interest rates are around 400% or potentially higher. Interest is charged on the loan amount each week and they last for up to 78 weeks. It is important that you know the costs of taking out a logbook loan and ensuring you can pay it back on time. If for some reason you are not able to pay the loan back in time, you may be in danger of losing your car as the logbook loan company own your car until you repay the loan.
If you are able to use an authorised overdraft, then this can be a great cheap option to cover an unforeseen circumstance. An overdraft will allow you to borrow money through your current account. Authorised overdrafts can work out a lot cheaper than other forms of credit, however an unauthorised overdraft may cost you more than a payday or short-term loan. It is important that you evaluate the costs of an unauthorised overdraft against other forms of credit and exploring all your options before allowing yourself to use one.
Credit cards can be a good way to borrow especially if you can repay it within a month as many will mean you pay 0% interest. If however you need money for longer than a month, it is important to work out how much you can repay. You may think paying the minimum payment is fine, but it can mean you pay a lot more in interest and will keep you in debt for longer. There are many websites such as MoneySupermarket, where you can compare credit cards to see the best deals. Whilst the best deals may be available for people with good credit, there are credit cards that are available for people with bad credit.
Financial decisions require thought and an ability to see through the immediate payday to the real cost of what you are doing. Is the demand really worth the cost? You decide.