Short-term business loans, also known as cash advances, can be a quick and straightforward way to access funds on short notice. Millions of Americans find this form of credit helpful, but it is expensive and should be used responsibly. Abusing these types of loans can leave you in a poor financial situation. That might be difficult to get out of. To avoid such a scenario, here are three habits to avoid and three others that will help you to manage your short-term loan as a temporary cash flow solution.
DON’T: TAKE MORE THAN YOU NEED
Short-term business loans are not a solution for long-term financial health. These loans may be helpful during a temporary cash shortfall, and you need quick access to funds. If you take out a loan, ensure you only borrow the required amount. However, you may qualify for up to $1,000 if you only need $600. It’s in your best interest to only take $600. Otherwise, you may spend the extra cash on unnecessary things and will only rack up more interest and fees.
DO: BUDGET AHEAD OF TIME
Before applying for a short-term loan, consider whether you would need the loan if it were payday. If the answer is no, this would mean you should be able to repay a significant portion of your loan on your next payday. Ideally, you should aim to repay your outstanding loan as soon as possible. Do the math and consider the financial impact of your decisions. For example, would you make three payments of $180 or 10 payments of $85? Choosing the latter will cost you over $300 more and extend your loan term by months. Think about what you can afford and budget to repay your loan quickly.
DON’T: ONLY MAKE MINIMUM PAYMENTS
Minimum payments are the lowest payment for your loan to keep your account with the lender in good standing. These payments may be composed only of interest or make a very small contribution towards your outstanding principal. If you have available funds, ideally, you should make additional payments toward your principal. Making the minimum payment makes the most sense when you truly cannot afford to pay more. Don’t make a habit, as months will go by, and you’ll be left wondering why you still owe the lender a significant amount of money.
DO: PAY AS SOON AS POSSIBLE
Before taking out a loan, you will want to ensure that there are no penalties for paying off your loan early. Except for Payday Loans, other forms of short-term credit, like Installment Loans, have longer loan terms. Open-end forms of credit, such as Lines of Credit, may not have set repayment amounts. But you should repay as soon as possible to minimize your cost. The longer your loan term or the longer you carry a balance with the lender, the more interest and/or fees you will pay over the loan term. It may feel more expensive to pay off your entire loan at once, but it can save you money in the long run.
DON’T: USE A LOAN TO PAY OFF ANOTHER LOAN
Loan cycling is the term used to describe the routine of using loans to pay off existing loans. Loan cycling is a dangerous habit, as consumers seldom have enough money to cover the interest incurred through their loan term. Once caught in a cycle of high-interest debt, it is difficult to get out. This is because so much of your payment is often going towards interest rather than reducing the principal. Consider other lower-cost options before taking out a high-interest loan to repay an existing loan. Contact the National Foundation for Credit Counseling if you have significant financial trouble and need professional assistance.
DO: UNDERSTAND THE TERMS AND CONDITIONS
People in a rush tend to forget their passports on the way to the airport or leave their coffee mugs on the roof of their car. If you’re going through an emergency or a stressful time when taking out a short-term loan. It’s easy to miss important details or skip over vital information. Formal loan documents may be extended and filled with legal jargon, but it is essential to read the document to understand your loan terms. Read your lender’s plain language Rates & Terms and FAQ pages for your state and loan product to understand how your loan will work. Call the lender and ask as many questions as necessary before taking out the loan. If you’re ready to apply for a short-term loan, keep these points in mind to avoid a financial headache down the road!
6 Dos AND Don’ts OF SHORT-TERM BUSINESS LOANS
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