Contrary to what you may have heard, short term loans are not soul-sucking financial monsters sent forth from the evil banking industry to drain your bank account and wreck your credit score. However, they’re not exactly angels of mercy sent to save you from a harrowing financial nightmare, either.
Forget everything you’ve ever learned about short term loans. Forget those ill-lit “Payday Advance” shops on the street corner. Forget the sob stories of your friends who used short term loans for anything from paying for a medical miracle treatment to a way of financing their latest yacht. Erase it all from your mind and approach the idea with a clean slate, free from judgment and ridicule, and decide anew after examining the true-blue facts.
Use the Right Financial Tool for the Right Financial Situation
Short term loans are a tool, just like a hammer or a screwdriver. You wouldn’t use a sledgehammer to hang a wall painting, and you wouldn’t use a hammer to take out that wall between your kitchen and your living room, now would you?
Short term loans are your sledgehammer: they’re not good for everyday occurrences, but there are still occasions where you’ll find yourself headed down to the hardware store to buy one. Before we learn about short term loans, however, we’ve got to address a few misconceptions about debt.
A Few Words on Debt…
Debt is a part of adulthood.
We’ll leave it up to you to decide whether it’s an unfortunate byproduct of modern society or a way of taking control of your personal finances. However you stand, debt is a necessary – if unfortunate – part of life. You’ll need to accrue debt when buying a house or a car, paying for your student loans, etc. In fact, you accrue (and pay off, hopefully) debt every time you use your credit card. However, accruing debt is a bit like walking on a balance beam: lean too far in either direction and you’ll fall.
If you’re using your credit cards to pay off your monthly expenses like rent or food costs, you’re not doing what financial experts call “living within your means.” You need to be using your income to take care of your regular expenses like food, water, and shelter. However, if you’re too scared to get a credit card even though you have a steady monthly income, you’ll have a hard time earning credit.
The main trick to managing debt is a simple principle: don’t write checks you can’t cash. Don’t give yourself monthly payments you can’t afford. If you can’t guarantee you can pay off that TV next month, don’t buy it. If you can’t guarantee you can pay your mortgage every month, don’t buy the house.
Take a Look at Your Debt’s Interest Rate
There are two main types of debt: high-interest and low-interest. Low-interest debt is generally your run-of-the-mill debt that most people have like a mortgage and federal student loans. It’s not exactly a pleasant thing to have, but it’s certainly better than high-interest debt.
High-interest debt is the debt found on your credit cards and – generally speaking – on your short term loans. This is the debt that you don’t want hanging over your head for a long period of time. It’s okay to accrue high-interest debt as long as you have a stable plan to pay it off.
When NOT to Get a Short Term Loan
Short term loans are not for every financial crisis you have. They’re like the glass box on the wall that says “Break in case of emergency.” In other words, you should only use them when absolutely necessary. Here’s when you shouldn’t get a short-term loan:
- To buy something you don’t need. It’s easy to crucify people who use short-term loans to buy things like fancy big-screen televisions or to put in an in-ground pool. However, you could just as easily use a short-term loan to finance something that doesn’t seem extravagant to you: an extra addition for a baby or a more fuel-efficient car.
However, you can keep saving for the addition by putting a bassinet in your room for the first few months. Though your gas bills are more costly, you know you can live with them; you can’t afford an entire new car, however.
- To purchase something you don’t have a plan for paying off. It doesn’t matter what you’re buying. You need a plan to pay back this loan or you’ll end up drowning in debt. Sit down with your budget and start slashing. Cut your morning coffee. Cut your bi-weekly movie trips. Cut your restaurant expenditures. You need a way to come up with those monthly payments or you’ll be writing a proverbial check that your bank account can’t cash.
When You SHOULD Get a Short Term Loan
- You’re facing a medical emergency in your family. This is a serious situation; you need the money and you need it now. You or your family’s health is at stake. If you don’t have the savings to cover it, you need to get a short term loan to pay the bills. Just know that you’ll be forced to severely cut your spending in the future.
- You need the money in order to make money. If your car breaks down and you don’t live in an area with public transportation, you’ll need to get your car fixed as soon as possible. If your glasses break and you’re an accountant, you need new glasses to start crunching numbers again. These are things you need to make an income; they’re considered a “necessity” so you can keep paying for your rent, electricity, food, etc.
- A family member is in financial trouble. If you’re absolutely positive you can pay off the debt and they’re unable to get a loan, you can save them from a financial crisis with a short term loan.
The Most Important Thing to Remember When Considering a Short Term Loan…
…is that you need a plan for paying off your debt. What expenses can you cut? What will you sacrifice? Make these commitments before you commit to a short term loan.