Taking out a short-term loan can be the right choice if you don’t make one of these seven big mistakes.
Living means making mistakes. Albert Einstein once said that a person who never makes a mistake never tries anything new. Stephen Covey said that the proactive approach to a mistake is to quickly acknowledge it, correct it, and learn from it.
Don’t be hard on yourself if you’ve made a few bad decisions. You’re learning. You never know when another wrong turn might bring you back where you started, ready to do it all over again with the added benefit of perspective.
Of course, it's also possible to learn from other's mistakes. Here are some of the biggest blunders people make with payday loans. Not doing the following offers a leg up on repairing one’s finances.
It’s a good thing when short-term loans are short.
A $25 fee (this is just an example) on a $100 loan is enormous, but it’s understandable when considering the default rate and that lenders must make a living somehow. If the borrower pays the loan on time, they can get back to their life and try to avoid expensive credit in the future.
However, if the borrower cannot pay off their loan on time, they may choose to take out another loan with another $25 fee. That means the borrower is paying at least $50 to borrow $100. Two weeks later, they may find themselves in the same situation again, being forced to borrow even more to pay off the old debt and the accumulated fees.
For some consumers, debt is life. Their loans get bigger and bigger, and they never find a way out. It’s a horrible way to live and the best way to avoid it is by paying the first loan off on time.
Being denied for a loan can be a good thing. If a loan applicant can’t pay off the debt they are asking for, it’s better when the lender says no. They may be doing the borrower a favor.
Here’s when short-term lending makes the most sense:
It doesn’t always work out this way. No law says a payday lender must have the borrower’s best interest in mind. A lender may not even make sure that the borrower can pay off the loan on time. In some cases, the lender may even hope the borrower needs to roll over the loan because that will lead to more profit for the lender in the long run.
Since there’s no one looking over the short-term lender’s shoulder, the consumer needs to be extra careful choosing the right loan provider. Picking one that acts in bad faith can be a costly mistake, as the lender may actively try to squeeze as much money out of the consumer as possible.
Four out of five Americans say finding a deal plays into every part of their shopping process. Since consumers gravitate toward the best offer, it’s no surprise that expensive, short-term loans are often the last resort.
However, borrowers sometimes forget about options available to them:
Americans always want the cheaper option, but sometimes the trick is finding one.
Bigger loans mean higher fees, making them that much harder to pay off.
It’s best to borrow as close to the amount needed, but lenders don’t always make that easy. In some states, there is a limit on the interest rate for small dollar loans. To avoid having to cap the interest, the lender may offer a higher loan amount. This can lead to the borrower taking out too much money and having a hard time paying it back.
Those who have no other option but taking out a loan that’s too big should try to pay the money off as early as possible. Because of the high interest, it’s never smart to use the extra money to make unnecessary purchases, although this can be very tempting when the money is there.
When one short-term loan doesn't cover a major expense, it can be tempting to combine a couple of loans. However, the overall interest makes this an expensive and inadvisable solution.
Loan providers do not want to lend to someone who is already paying off a payday loan because it increases the chances of a default. That should make anyone stop and think about the risks of taking out multiple payday loans.
Some lenders offer the loan amount through a prepaid debit card. This can be a viable option for payday loans without a bank account, but the borrower needs to be careful using a debit card that includes a monthly fee. The added expense can significantly decrease the value of the loan.
Sometimes lenders will offer a money card only usable through its retailers, limiting the borrower’s shopping power by prohibiting them from finding the best deal online.
Thinking outside the box is great in business, but not so much when filling out a loan application – entering fake information into a loan application, hoping to increase the chances of being approved, is illegal.
Lying in a loan application is more common than most think. One out of three applicants put fake information in their loan application. Most of the time the lender will reject these kinds of leads, as they have ways to validate an applicant’s identity and credit history.
The real danger here, though, is being approved for a loan after using fake information. Nobody is going to come after someone who lied and did not receive the loan. However, those funded under false pretenses may face prison time if convicted. This includes inflating one’s income amount.
Short-term loans can be a snug fit for those small, financial inconveniences. As long as these seven big mistakes are avoided, taking out a payday loan can be a positive step toward financial independence.