My name is Nisha Sharma. I represent a site called CompareLogbookLoans.co.uk. I love to write, especially about travel, finance and offer business advice.
The advertisements for short term loans like cash advances, payday loans or short term installment loans often make the debt seem like a solution to financial problems. The loan suggests that it is possible to avoid high cost late fees and other complications with finances. Unfortunately, short term loans are a bad idea because they can cause more problems than solutions.
The Interest Charges:
The most important reason that short term loans are a bad idea is the fact that the interest charges are extremely high, whether its logbook loans or a bank loan. The average payday loan will cost as much as 390 to 780 percent APR. That means that a loan of $100 would end up repaying a total of $490 to $880 by the end of one year.
The APR, which stands for annual percentage rate, is the amount of charges added to the loan each year for the privilege of using the funds. The average homeowner will pay around five to eight percent in interest charges each year on a home. Even a credit card, which often charges around 20 percent for most consumers with average credit, costs much less than the average short term loan.
Since short term loans charge a set fee based on the amount borrowed rather than charging an interest rate, the lenders are able to charge much higher interest fees than the average loan. Part of the reason is that the short term loans are designed to repay within a short time frame. The argument is that since the loan is repaid within a few weeks or a couple months, the fees and charges are the only way the lenders will make money. The downside of this thinking process is the fact that the consumer pays much more for the loan than is fair.
Unfortunately, the loans are still legal because the fine print of the paperwork gives the interest amount when it is charged on an annual basis. This means that the lender is pushing the responsibility of the interest fees onto the consumer by putting it into the paperwork.
The Debt Trap:
The problem is not only with the interest charges, but also with the possibility of a debt trap and snowballing cycle. The high charges often seem affordable at the time a loan is acquired, but over time those additional costs add up to a problem that is impossible to manage.
The debt trap occurs when borrowers are unable to repay the short term loan according to the terms. The loan amount builds up and increases exponentially so that the borrower finds the situation impossible to manage. With each missed payment, the same fees and charges put onto the account initially are added again and the loan turns over. After a few weeks or months, the borrower ends up paying back the full amount that was borrowed and still has remaining debt.
Once the debt trap begins, it is difficult to get back under control and financial situations gradually get worse. The resultant payments sap away extra money each month in interest fees that might range from $30 to several hundred dollars. That makes it difficult to manage other financial necessities like the bills and rent or mortgage payments as extra cash is sapped away.
The result of this gradually growing debt problem is a financial downfall. When the charges on short term loans are no longer possible to manage, other financial obligations might fall to the side as well.
Short term loans are always a bad idea. The loans have extremely high interest rates and the short period of time provided to repay the funds often results in a debt cycle that is difficult to break. When emergencies occur, taking out a reasonable long term loan or opting for other financial solutions is a better way to get the situation under control.