Staying Cautious with Short-Term Loans

CONSIDER THIS: The ability to quickly cover emergency expenses is generally what can make a short-term loan seem like a good solution. According to BankRate, 61 percent of American households would not be able to pay for a $1,000 emergency out-of-pocket. That could make a quick injection of cash seem like an attractive option.

But finance companies don’t give away these loans cheaply. Western Financial, a third-party organization that connects borrowers with short-term lenders online, estimates that a $1,000 loan with a loan term of 12 months would come with a 24 percent interest rate, a 3 percent fee and a nearly 30 percent APR. It is not unheard of for some short-term loans, known as “payday loans,” to have a 400 percent APR. These loans, named because they typically become due at the time of the borrower’s next paycheck, costs about 12 million Americans about $9 billion in loan fees each year, according to the Pew Charitable Trust.

Here are some ways that can help you avoid the need for a short-term loan:

• Create an emergency fund. The best way to avoid the necessity of a short-term, high-interest loan is to make sure you have enough saved to cover financial emergencies that may arise. Structure your budget so you’re putting a small amount per week into an emergency fund. As your financial health improves, begin putting more into the fund. Over time, it will add up to cover at least part of your next unexpected expense.
• Talk to your creditors. If you’re behind on bills, try talking to your creditors about working out a payment plan. Many will consider lowering or delaying a payment or two to help you pay off the debt in full. Make sure you understand any additional fees that may be associated with the new plan.
• Consider a life insurance loan. Many whole life insurance policies allow for loans as long as you have cash value in the policy. Borrowers have their entire lives to pay the loan back and debts that aren’t repaid will be deducted from the amount the policy pays out after the holder dies.
• Find a quick source of cash. Consider picking up a side-gig or selling unwanted items for extra money that you won’t need to pay back. You may also want to look into apps that can make users extra cash.
• Try a personal installment loan. Personal unsecured installment loans are offered by responsible lenders, including credit unions and other financial institutions. In contrast to finance company loans, these products feature minimum 90-day repayment periods, installment options, and limits on how often the loan can be renewed. Personal installment lenders will also consider the borrower’s ability to pay and won’t use unfair collateral, such as car titles.