Short term loan pitfalls

The press regarding short term loans has mixed reports. This type of loan is very handy in a short term financial crisis and may help provide a breathing space while the borrower figures out a more permanent solution. On the other hand, there are a number of associated pitfalls that could mean taking out a short term loan will complicate your money problems even further. Inform yourself before you put your signature on a loan contract, in order to avoid these commonly encountered pitfalls.

Being surprised by the unexpectedly high total cost
At first glance, the interest on a short term loan may seem like a surprisingly small percentage. Remember, though, that the rate first mentioned to you is probably per month, rather than per year. Inquire about the Annual Percentage Rate (APR); the lender is legally obligated to disclose this and all other costs of the loan to you.

Expressed as a yearly percentage, the rate may turn out to be an amount such as 36 percent, rather than 3 percent. Find out about other charges you will be required to pay, such as such as a transaction fee and penalties for either early or late repayment.

If you are unable to discharge your debt on time, you may be able to request a rollover of the loan, but that, too, comes at an additional financial cost.

Not reading your loan contract carefully
A short term loan contract is a legal document. You are well advised to read it through thoroughly to familiarize yourself with all it says before you sign. Make sure that the APR and additional charges listed are the same as the figure that was quoted to you. The loan period should be double checked as well.

Check whether the lender will have access to your bank account in case you are late with your repayments. (If you take out this type of loan from your bank rather than a short term loan store, the bank can access funds in your account even without specifying this in the contract.)

Not preparing for unexpected expenses
Very often you will be asked to leave one of your personal checks with the lender, in the amount of the loan plus interest and fees, postdated to the day the loan is due to be repaid. It is important to make a note of the amount and date and be prepared. The lending institution is not likely to delay in depositing your check. If there are insufficient funds to cover it on the due date, your bank will return the check and the lender will attempt to redeposit it — often more than once.

Every time that same check bounces, you will be charged overdraft fees. If the lender eventually turns your debt over to a collection agency, you’ll be responsible for the collection fees on top of the original loan amount, loan fees and overdraft charges.

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