Short-term cash loans can get you stuck on the debt treadmill

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Author: Ravi Philemon

Payday loans (also called “cash advances”) are short-term cash loans which are typically for smaller amounts of money. It is important to understand that different short-term cash loans fit different purposes.

Short-term cash loansShort-term cash loans are generally extremely expensive

While short-term cash loans may seem like a quick solution to a cash crunch, they’ll cost you a lot more in the long run. A payday loan of $100 to $500 can carry an annual interest rate of 390 to 780 per cent.

Payday Loans Can Trap You In a Cycle of Debt: Payday loans are due in full on your next payday, typically in a month’s time. If you are not able to repay the loan that fast, as most borrowers are not, you can get stuck on a debt treadmill. This happens when borrowers, unable to repay the loan, take out new loans or rollover the old one. You pay the fees on your loans over and over again, without ever being able to pay off the loan.

If you have a short-term cash loans, and are having trouble paying it off: 
  • Work with the lender. You may wish to make payment arrangements with the lender, such as offering to repay the principal amount of the loan.
  • Cancel bank drafts. You can notify your bank that you wish to cancel any GIRO that lets the payday lender debit your bank account. Notify your bank within four days prior to the deduction date and also notify the lender in writing that you have revoked their authorisation to withdraw funds from your bank account.
  • Close the account. If the lender continues to try to draw funds from your account you may have to ask the bank for a permanent closing of the account. (But be sure to open a new account at a different bank before you close the old account.
  • Stop debt collectors. You can ask that efforts by the payday lender or a debt collector to collect on the loan stop. If the lender or collection agency harasses you can take a court order against them under the Protection from Harassment Act.
  • Look elsewhere. Alternatives to payday loans include small savings accounts; salary advances from your employer; working out an extended payment plan with your creditor; loans from friends, relatives, and social service agencies. Also, some credit cooperatives may offer low interest, short-term loans with quick approval that are a much better option than payday loans. Other options that are more expensive than a credit cooperative loan but better than a payday loan are a credit card advance.

A line of credit is another type of short term cash loan that is a great way to tackle cash flow issues. One benefit of a line of credit over most other short term personal loans is that banks do not charge interest for the part that you don’t use.

For example, if you have a credit line of $30,000, but you’re only using $15,000, you’ll only pay interest on what you use ($15,000). Borrowers can continue to take out as much as they need, as long as they don’t exceed the maximum amount of the credit line.

A bridge loan is another short term cash loans which you can utilise if you need extra finances. For example, if you buy a new house but your old house is still on the market and has yet to sell, you may need a bridge loan to help cover both mortgages. Generally, borrowers must put up some type of collateral (e.g. their for-sale home) to back a bridge loan.

Though bridge loans have greater fees and interest rates than home equity loans and other short term personal loans, they are a good option for many homebuyers who can’t hold off on buying a new home or selling an existing one.

A home equity loan may be the best option which lets you borrow money, while using your house as collateral. Home equity loan is helpful as short term cash loans option if you have run out of cash but have a valuable house. So without resorting to the usual choice of selling your house, you may opt for home equity loan. A home equity loan lets you get money out of your house, without having to lose it.

How to Secure Personal Loans Quickly

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