Short Term Cash Loans

The use of short term cash loans, or payday loans, to take care of financial emergencies is a controversial issue. The payday loan industry claims to meet a specific consumer need that is ignored by other lending institutions, such as banks and credit unions. Many people know, at some point in their life, what it is to experience a financial emergency. Perhaps the electricity will be cut off if the utility bill isn't paid by the end of the day. Maybe a child falls off his bike and his bleeding chin requires a trip to the emergency room. But the family doesn't have health insurance to pay for the bill. It could be that the transmission conked out of the family's only means of transportation. How will the breadwinner get back and forth to work unless the car gets fixed? Or the mortgage payment is due and the homeowners only have half the amount needed to make the payment. For each of these scenarios, and hundreds more, the affected persons may apply for short term cash loans to get over the current rough spot. The urgent need can make it difficult to look at the crisis without emotion clouding the situation. But this is exactly what the prospective borrower must do -- he or she must consider what options will address the crisis and which ones will have the least adverse affects.

The nature of short term cash loans differs from most other types of loans. A majority of loans are secured. This means that funds are given to a borrower based on a tangible asset which is used as collateral for the loan. For example, a house is a tangible asset which is the collateral for the mortgage. If the homeowner fails to make payments, the mortgage holder begins foreclosure proceedings and takes back the property. Other types of loans are unsecured. Also known as signature loans, this type of funding is most often based on the applicant's credit history and FICO score. A person who meets the lender's qualifications can borrow a certain amount of money without collateral because he or she has a proven track record of paying bills and has shown employment and/or residential stability. Credit cards can be classified as a type of unsecured lending. When credit card holders stop making the required payments, the credit card companies turn the accounts over to collection agencies. Revolving accounts such as credit cards usually aren't considered short term cash loans, even though some consumers may use them that way. For example, a consumer may make several purchases throughout the month using a credit card and pay the balance in full when the bill comes due. The consumer pays no interest because the balance is paid before the due date. In effect, the consumer has used the credit card as a short term loan. However, the consumer hasn't received actual cash.

Secured and signature loans are usually given for an extended period of time at a relatively low interest rate. But short term cash loans may have a term that only lasts a matter of days. For example, a payday loan may have a due date only two weeks or a month after the borrower receives the funds. The interest rate or fee may not seem like much, but calculates to an annual percentage rate that is astronomical. Some lenders charge interest rates and fees that end up with an APR of 300% or more. There are reports of borrowers paying what amounts to an APR of over 900%. The payday lenders promote how easy it is to apply for their loans. Almost anyone with a job and a bank account can get access these short term cash loans no matter his or her credit history or FICO score. The lender receives a check for the amount of the loan plus the interest from the borrower in exchange for cash. The lender then cashes the check at the end of the term. Or the lender gets an authorization from the borrower to withdraw the loan amount plus interest from the borrower's bank account on the due date. If the borrower can't make the payment, the lender may extend or roll-over the loan. This can create a borrowing cycle that is almost impossible to escape.

The payday loan industry and its supporters defend their practices. But God's Word has this to say about high interest rates: "If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury" (Exodus 22:25). There may be a legitimate need for companies to short term cash loans to people in need of a quick financial fix. But that does not give companies license to trap borrowers into a loan that continues to grow despite their best efforts to repay the debt. Because of consumer horror stories, both Congress and many state legislatures have passed legislation in recent years to cap the interest rate and fees that payday lenders can charge their borrowers.

Before applying for short term cash loans, prospective borrowers need to consider other options. If possible, they should apply for a small loan at a bank or credit union. If they have a credit card, they may want to get a cash advance. Even though that may mean an additional fee, it will almost certainly be less than the calculated APR on a short term payday loan. The situation may be eased by calling or talking to the creditor. For example, for the examples given above, the person may get assistance by talking to someone at the utility company, the emergency room's finance department, or the mortgage company. Everyone has financial emergencies, but the very best way to take care of them is to establish an emergency fund. It may be hard to find money to put away in a savings account designated for emergencies, but this is the best way to avoid falling prey to high interest predators.

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