Looking for a Short-Term Loan to Clear Debt: You might have in Fact a Bigger Problem

There is no doubt that short-term loans are truly helpful. The products can serve as your lifeline in case you suddenly get to a situation wherein you need fast cash. What is ideal about the loans is that the maturity can be as short as two years, most of the time even shorter. It can be the best product available for paying off your other debts. You may even use it for debt consolidation.

It is just logical for you to prefer taking short-term loans than long-term ones. If you want the idea of having to deal with debt in a shorter period, the financing product can be the best for you. But it comes with some disadvantages, which may make you realise that taking one can spell a greater trouble. Here are some reasons for that.

High monthly payment

Before applying for and obtaining a short-term loan, be sure you can actually afford the usually high monthly payment that will be required. This is logical because you will be financing principal debt over a short period. Thus, you should shoulder a bigger chunk of monthly payment. In comparison, with the same amount of loan, a long-term debt will require a smaller amount of required monthly amortisation. It will be a great trouble if the high monthly payment for a short-term loan does not comfortably fit within your current budget.

Prepayment penalties

For a short financing contract, your short term loan may come with a relatively low interest rate. But your lender must still make sure it will generate any profit from extending you credit. That is why it is just normal for your loan provider to impose a high prepayment penalty in case you decide to pay off your short-term loan earlier than its intended duration. This may mean that you have to let the loan take its normal course, with all the fees and interest payments that come with it. If you are not comfortable having a debt obligation even over a short period, you might see this as an issue.

Responsibility for monitoring

Once you get a short-term loan, it is assumed that you fully understand all the terms and conditions stipulated in the contract. It is your sole responsibility to monitor the account and make sure you make required payments on time. If you are a busy person, there is always a possibility that you might oversee a due date and forget making payments on or before the required time. This could spell greater trouble because delayed payments will certainly and quickly incur penalties and other charges. In the end, you will find additional costs in servicing your loan.

Possible impact on credit history

Getting a short-term loan can be a good strategy to earn positive credit scores. But it can also possibly incur negative points, especially if you make delayed payments or worse, if you default on it. If you already have a good credit history to begin with, you should be ready to tarnish it. Aside from that, you may realize that a good credit standing may also be required for you to get an approval for a short-term loan.

Andrew has been writing about debt management for over 4 years, publishing numerous articles and posts on short term personal loans, debt consolidation and debt management. Andrew holds a BA in Finance and has a vast experience in the finance industry. You can find more about Andrew on his Facebook page.

About The Author

Keroy King

Keroy King is a Financial Educator, Podcast Host, Keynote Speaker & Empowerment Expert, residing in Los Angeles, California and the Founder of "Life Then Finance" a community where she coaches individuals to overcome personal and financial obstacles that are holding them back so they can quickly and effectively live a full-filled and purpose driven life. Even when they think the odds are stacked against them. She is also an online course creator & instructor of several personal finance and personal transformation online courses.