Almost everyone needs to borrow money at some time. The average person finds it immensely difficult to afford education, housing or other common purchases without taking out a loan. If they don’t get a loan for these reasons, they may have to get one due to unexpected expenses such as loss of a job or medical bills. However, this doesn’t know that you take out a loan that’s going to burden for years. This is the time when you opt for short term loans that can provide you with the funds you need and have to be paid back within a year.
The primary reason why short term loans exist is to provide an individual with funds to pay off an expense when they don’t have immediate cash on hand, but do expect to get it in the near future. For instance, a business may need money to purchase some raw materials, but doesn’t have cash because some clients haven’t cleared their dues as yet. Likewise, individuals may need to buy some things at the end of the month that can’t wait even though they will receive their salary in the beginning of the next month. This is when short term loans can be quite handy.
As opposed to long term loans, the interest rate charged on short term loans is higher due to which this can prove to a bit expensive. However, the fact that interest only has to be paid for a short time and the funds are immediately available often outweigh this downside of short term borrowing. The most common type of short term loans are payday loans, which have interest rates that can go as high as 400%. Most people wish to avoid taking out these loans because they lead to a cycle of debt accumulation and borrowing that isn’t easy to escape.
There are some precautions that individuals should take before they take out short term loans. As mentioned earlier, people borrow funds because they expect to receive money in the future, but they should always be certain of this fact. This is because if they don’t receive the funds, they will end up with a loan that has an abnormally high interest rate and not be able to pay it back. Furthermore, missing loan payments can damage one’s credit score, preventing them to borrow money in the future and force the lender to hound you for payment.
Unless absolutely necessary, people should avoid taking out short term loans. These loans shouldn’t be used for purchasing something that people cannot afford as the cost of borrowing will be too high. Most people use the tactic of rolling off the loans to get rid of these debts, which means they take out another loan in order to pay off the existing one. But, if the second loan is also a short term one, it will be due within 12 months. Therefore, the best way to pay them off is to trim your budget a bit and make repayments in order to avoid paying interest.