Short term loans: free cheese – only in mousetraps

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Statistics show that the population’s indebtedness is growing faster than the average salary. This trend suggests that some people borrow too lightly, viewing loans not as a value-creating investment, but as an allowable additional income for daily needs. Easily accessible credit, even in small amounts, can eventually turn into a snowball rolling down the mountain and burden you with a difficult hump of debt. What should be taken into account to avoid such a scenario, experts from the financial institution advise.

First, it is probably appropriate to describe short-term debt and its characteristics. AS:

• short-term loans: these are loans for a period of up to 5 years, issued in relatively small amounts and often without additional security measures (pledge on property or personal guarantee);
• it is one of the most expensive types of credit: the creditor, without requiring additional guarantees, tries to insure himself against the risk of non-repayment of part of the loans with higher interest rates;
• from a financial point of view, this is the least justified loan: usually small sums are borrowed for a short time to improve the family, for a specific purchase or simply «to stay without a salary», which usually does not create any investment value;
• is one of the most popular ways to borrow: due to low requirements, such loans can be obtained by residents with fewer financial opportunities than, for example, in the case of a home loan.

In summary it can be said that, despite double or even triple-digit interest rates, short-term loans are probably the most popular form of credit. It’s really easy to get tempted: small sums, usually there’s no pledge or guarantee, sometimes it’s not even necessary to have a stable income. Short on funds for new shoes or cosmetics? A relative’s anniversary is approaching and you need a gift? One two and within ten minutes the account fills up to several hundred. However, in this simple scheme there are many dangers that not everyone pays due attention to and which can lead to an endless carousel of loans.

Therefore, before signing a short-term credit agreement, experts at the Finance Institute suggest thinking about:

• The reason for the loan. Borrowing is considered reasonable when the borrowed funds create value. For example, a loan to purchase a home, studio or business is an investment that can bring a potential return in the future. Even a car, if it helps you reconcile family and work or get a higher salary, can pay off in the long run. But after buying new clothes, household appliances, spending money on entertainment or vacation, the earnings are dubious: the value of such purchases begins to decrease immediately after purchase, and they do not help to increase income or reduce expenses.

• Loan conditions. If you have decided that the need to borrow is justified, it is important to choose the right lender. Nowadays, when not only relatives, friends and banks, but also strangers can give loans, it is necessary to examine in detail the conditions offered by creditors. For short-term loans, the most relevant aspect is the total cost of the loan, which includes not only monthly interest, but also one-off administrative costs. When evaluating interest, it is important to compare their annual rate. If you look at one month’s or one day’s interest, as is often advertised, the numbers will be deceptively low. For example, “0.5% for a day” seems acceptable and safe, but if you borrow for a year it would already become 182.5%. It can be calculated not as a percentage, but as a value. If the item costs 100 euros, only 0.5% is applied if you purchase it with a loan. interest per day, after 6 months its price will increase to 190 euros and with a loan subject to 15%. annual interest rate – only 107.5 EUR. So, it’s always worth checking what the seemingly small numbers actually mean.

• Is it worth overpaying? The process for obtaining a short-term loan is very simple: it is often enough to send an SMS message or fill out an email. the application. However, in exchange they ask to pay, and a lot. As the example mentioned above has shown, such a loan can also dissolve almost the loan amount. Therefore, you should evaluate whether the simplicity of the procedures is worth that money and the saved visit to the lender.

• How much funding is really needed?? Some lenders provide a floor, i.e. a minimum loan amount. At first glance it seems interesting when you can constantly replenish your wallet with a few tens for «small expenses». However, if the requested amount is less than 50 euros, the need to ask for a loan is hardly justified. Savings should be used for unexpected events such as illness or a broken car headlight. Of course, not everyone has them, but perhaps it would be more beneficial to change the behavioral strategy, for example, walk for a while and wait for the next paycheck?

• When and how will you repay the loan? Even if the amount borrowed is not large, it is important to evaluate your repayment options before signing the loan agreement. What seems like extra income this month will turn into a loan next. Budget modeling would help visualize this situation better. For example, if 1,500 euros is usually enough for a month, with a loan this amount will increase by at least one hundred euros. And if you do not review it on time and transfer the payment late, this amount will increase even more. So it is important to consider from which sources this money will be returned.

• How a sparrow turns into a moose. Taking care of yourself today is not worth giving up tomorrow. The words “loan” or “financial obligation” do not go well with levity. There are no insignificant amounts, less important payments or invoices, small payment delays, «just» a few days late, etc. Every penny and every day counts – if not now, then at least in the future. However, even the smallest financial deviations, be it a late payment of the loan or a debt of 20 euros for the telephone connection, are recorded in a person’s credit history. These latest records should not be underestimated: they can seriously sour future plans. For example, preventing you from getting a home loan or making it significantly more expensive, preventing you from even renting a TV or computer. Not only that, several tens of euros later, due to the late payment interest, there could be the threat of appeals from the bailiffs and the request to also cover the debt collection costs.