Unfortunately, situations may arise when you don’t have savings available to respond to unexpected expenses. If traditional avenues like credit cards, bank loans or assistance from family and friends aren’t available, you may start scouring the internet for a short-term loan from an alternative lender.
What Is a Short-Term Installment Loan
A short-term installment loan can range from several hundred to thousands of dollars. It is typically repaid over a period of months with a fixed interest rate and predictable payments made on a prearranged schedule. Short-term loans rarely require collateral.
After the financial crisis of 2008, banks became less willing to lend money, especially to borrowers with low credit scores or no credit history. Alternative lenders filled this void in the marketplace, offering short-term loans to consumers with less-than-perfect credit. Interest rates for these loans are higher than traditional financial products because the risk of default is significantly higher.
Do Your Research
The online marketplace now offers consumers a large selection of alternative lenders, which means consumers have a choice to make and doing so wisely can be the first step in saving money on your short-term installment loan. When comparing lenders and products, consumers must carefully analyze APRs, payment schedules, contracts, and policies regarding early pay-off and late payments to find the combination of elements that best suits their needs. For instance, if a lender has a lower APR but has a shorter pay-off period, your installment payments may be too high for you to afford. You might be willing to put up with a higher APR (and pay more for the loan overall), in order to make smaller payments over a longer period of time.
Stay in Contact with Your Lender
If it becomes apparent you won’t be able to make a scheduled payment on time, contact your lender as soon as possible. A reputable lender will be willing to work with you because neither party wants to go down the path to default. By communicating your situation with your lender in a timely manner, the lender may provide you a one-time extension on your payment, saving you fees and protecting your credit score.
Pay Off Your Balance as Quickly as Possible
When researching the terms of your short-term loan, pay special attention to your lender’s policy on prepayment. If the lender charges a prepayment penalty, consider it a red flag because it denies you one of the most effective ways of saving money on your short-term loan. By paying off the balance in full as soon as you are able, you avoid paying interest on the remaining payments. As stated above, APRs are high on these types of loans, and preempting even one scheduled payment will save you money.
Never Borrow More Than You Need
Alternative online loans are expensive financial products and should only be used if traditional financial products are unavailable and when the expense is absolutely necessary. If you choose to use a short-term loan from an alternative lender, do so responsibly by only borrowing the minimum amount needed to resolve your situation. You want to make sure you can afford the scheduled payments, and if possible, pay the loan off early. Taking on more debt than necessary will cost more money in interest and potentially harm your credit score if you make late payments or default on your loan.
Save by Being a Smart Borrower
Yes, short-term loans are expensive, but you can save money by being a smart borrower. Do your research and know what you’re getting into before signing any loan agreement. Make sure you have the option to pay off your loan early without being subjected to a prepayment penalty. Stay in contact with your lender if you encounter any bumps along the way, and never borrow more than you need.