Television and radio advertisements often push debt relief or financial products like short term loan options. While these options may be appealing to those experiencing financial hardships, they often cause more problems down the road. In general, it is best to stay away from short term or payday loans for the following reasons:
They carry high interest rates and fees
Many people choose these for the fast cash they can offer, but fail to read the fine print. Short term and payday loans often carry high interest rates, which can cost you much more money for repaying the loan. It isn’t uncommon to find these loans offering $5,000 loans at 30 or more percent interest. That means you would end up paying an additional $1500 on top of repaying your loan amount of $5,000.
They have steep penalties for defaulting
While these loan options are quick to flash their perks many hide the awful truth in their details. In order to offer “no credit check” to consumers, many payday or title loan companies require a car or mortgage title to be held as collateral against the loan. This gives the company the right to repossess or liquidate the asset in the event you default on the loan. Further, steep penalty and delinquency fees can run up the interest rate on the loan or apply a large flat fee for missing a payment.
They can complicate other debt management solutions
People also fail to consider how these loans could complicate the process if the need to seek bankruptcy or a debt settlement arises. Since many of these loans are secured against assets as collateral, you could find yourself in a mess when filing for bankruptcy.