Many people in the UK will at some point in time turn to a short term loan in one way or another. Whether in the form of payday loans online or perhaps other types of short-term funding, they tend to be a very convenient way of accessing cash, as the application processes will usually be swift and easy to do, with many lenders also helping to provide the much-needed finance to those with a bad credit score and history.
However, this doesn’t mean you shouldn’t exert some caution. This is because these kinds of loans typically have high -interest rates as they are unsecured. They are also provided on the basis that they are needed to help in a financial emergency, not specifically and exclusively just for luxuries.
How then should one use a short-term loan in the correct manner? We explore the ways in which you should use a short-term loan wisely, whilst exercising caution to avoid spiralling into debt.
Avoid Getting into a Debt Trap
You should thoroughly assess your finances and how much you will need in reality when it comes to getting any kind of short term loan. Many people fall into the trap of taking out a payday loan, only to realise after that they have not considered that they also need to not only pay off the original amount, but the interest too, and then find themselves in a similar situation to the one they were in prior to getting a loan.
This tempts people into taking out another short-term loan to cover outstanding expenses, and for some, this can turn into a cycle of debt, which is why you should always avoid getting out loan after loan and should manage your expenses effectively.
Managing Finances in the Short Term
You should also look at other avenues that can help to provide a source of income in the short-term if you think that you may be tempted to take out any additional loans. For example, you could think about selling higher value items (such as TVs, computers and other high-cost electronics) which could quickly provide you with much-needed extra money.
Another practice that is often recommended is the setting up of an emergency fund so that in the event you need urgent financial assistance in the future, you have savings that you can turn to instead of having to look for higher cost short term loans. You could set up a direct debit from your bank account, so that a certain amount each month comes out of your main account and into a savings account you have set up so that you can put away money without having to really think about it.
Think Carefully About the Amount You Borrow
As a rule of thumb, only get a short-term loan to cover the amount you specifically and urgently need to get by for that precise moment in time. On average in the UK, the amount requested for a payday loan in recent times was around £260, with nearly all loans totalling less than £1000 in total.
Whilst the temptation exists for borrowers to take out more money than you actually need so that you can fix a number of financial problems at once, it could end up being more trouble than it is actually worth. You should therefore always remember that the higher the short-term loan amount that you borrow, the interest rate will also be higher too.
Stick to the Essentials When Searching for Loans
Over 53% of people who take out a payday loan use the funding to help pay for living expenses, which is in most cases, the wise thing to do. Only 7% used it for buying new clothes, something that most lenders will advise you steer clear of, with clothing not being essential in the same way as say a boiler repair or emergency bill is.
Short-term loans are in no way ‘free cash’ with no consequences and really should only be used to pay for essential items, as you will only end up incurring extra interest whilst saving to pay that back. Use the loan to help with things such as broken facilities in the home, food and electricity or for transport reasons.
Use Short Term Loans for Emergencies
You should really only use payday loans or other kinds of short-term loans in cases where you need to deal with financial emergencies where you require immediate funds. When you have taken a short-term loan out it is also recommended that you then create and implement a realistic and effective spending plan and stick to it as best you can.
Pay the Loan Back Quickly
It should be a priority to pay the short-term loan back as soon as possible once you no longer require financial assistance. This is partly to do with improving your credit score (many access payday loans due to a bad credit history) as it will be put on your file that you have paid this loan back promptly, which could make it easier to access funding at a better interest rate with mainstream lenders at a later date.
Don’t Skip Your Loan Repayments
If you miss your short-term loan repayments you could end up incurring additional fees for missed or late payments. This will also negatively impact your credit score too.