Let's talk short term loans. Who typically gets freaked out by them?!
I know somewhere along my journey to adulthood, I picked up the belief that they’re schemes, scams, or something to be avoided. But the reality is that 40% of Americans have a credit score under 680. Which means they are rejected when they try to get a new line of credit; like a credit card or loan from a big bank. This can be really stressful when you realize that 41% of Americans are unable to cover a $400 emergency expense. Back when I was a substance abuse counselor, I saw just what a toll this took on people.
Working in substance abuse, with a population I consider to be particularly vulnerable, my views on short-term loans quickly changed. I realized just how many people relied on them to keep a roof over their heads each week. So many of my clients would barely have $100 in an emergency fund. They’d be working steady jobs, but still scraping to get by.
Often times, they either had to send many back to their family to support their child, pay off debts they accrued, or were paying for their primary residence still while living in transitional living. Then when you throw in an unexpected expense, like a flat tire or someone ate all their groceries that week (it happens more than you’d think!), this already vulnerable group of people ended up hurting even more. When unexpected financial burdens inevitably came up, it would compound with their already stressful financial situation and make it difficult – or even impossible – to pay for their transitional living space. This often resulted in them getting kicked out and falling back into old habits.
The reality is, unexpected expenses come up for everyone. Flat tires, burst home pipes, and the list goes on and on! Where are people to turn when the banks or Credit Unions say no? Credit cards often come with high interest rates which end up costing even more down the road. It’s tough for many to find odd jobs and increase their income. Plus, asking family or friends for support isn’t always an option.
The pros of short-term loans
Short-term loans can be great since the terms are usually fairly easy to understand. There is a fixed term (time period) you have to repay the loan. Meaning you have to give all the money back by a certain date which depending on the loan can be weeks to months. Typically, there aren’t any penalties for paying off your loan early, but there can be, so make sure you read and understand everything before accepting the loan!
This is particularly helpful compared to a credit card, where if you paid the minimum balance off each month, you’d still be playing catch up as interest continues to accrue. Meaning when you’ll actually end up paying off the credit card can take a lot longer than expected and it’s up to you, there’s no finite end date. The other great thing about short-term loans is that there’s a fixed interest rate. You don’t need to worry about your interest increasing and then your monthly payment increasing, it’s all locked in when you agree to the terms of the loan.
But are they predatory?
With that said, short-term loans have historically been viewed as predatory. The interest rates associated with short-term loans can often be so high that it would leave a financially sound person wondering why anyone in their right mind would ever take one out. They can give the appearance that they are keeping the underbanked and underserved communities just that, underbanked and underserved.
Why it's not as predatory as it sounds…
While a high-interest, short-term loan may sound like a bad idea and like it's keeping the underserved down, the reality is, it's often the only option for when you have bad or no credit, no family with the resources to help out, and no assets. Just think about my former clients who were often just scraping by, but a short-term loan, while not ideal for their financial situation, was the difference between being homeless or not. If they didn't have access to a short-term loan they would've been kicked out, and ultimately in a worse spot financially as they'd have to save enough money to get move-in costs plus standard rent together for a new place. Getting rid of their access to a short-term loan wouldn't have helped or protected them.
Current state of short-term loans:
Currently, state legislators are threatening to lock out America’s most vulnerable people from accessible credit options. In doing this, they’d force people to turn to unregulated lenders or have to beg family for money. This means that one of the most dependable ways for people to get money quickly could completely disappear this year. Everyone deserves to have a financial lifeline. Of course, I’m not naive, and watched plenty of my clients blow their paychecks on tattoos, shoes, and energy drinks. But that was their choice and it was their choice for how they bailed themselves out of spending all their rent that week. If that meant they took out a high interest short-term loan, then that’s what it meant. At least they had a choice in the matter and many learned from their mistake and an option to keep their lives moving forward, and many learned from their spending mistakes and planned better in the future.
How many of us have made money mistakes in our history?
At some point the majority of us will all be hit with financial troubles and need some help. It’s time to break the stigma and ask for help. It’s time to stop vilifying those who offer it. By breaking the silence about our own stories and experiences, we are supporting our fellow families to rise up and we can all encourage our state legislators to keep short term loans with good consumer protections in place.