In an emergency a short term loan may be the quick fix you need. However, getting a short term loan or using a credit card to tide you over to your next pay can be a hard cycle to break. High interest rates may increase your overall debt and in the long run, a short term loan could have detrimental effects on your savings and financial health. Breaking this cycle is best to be done as soon as possible.
If you have a number of short term loans, consolidating these over a longer repayment period may help you get back on track. This essentially means paying off your short term loans in full with a longer term personal loan, ideally with a lower rate. This means that you are repaying a single loan over a longer timeframe at a reduced interest rate which may enable you to focus on strengthening your financial health and saving the extra cash.
Example: James owes $4000 and $2000 on a credit card and store card respectively. Both have interest rates of 17%. Because the accounts are overdue, they are due in full immediately. By consolidating these two accounts into a $6000 personal loan, he is able to close both accounts and pay off the personal loan at a lower rate of 13% over 3 to 5 years. As the credit card and store card balances were due immediately, James was unable to manage his accounts with a repayment schedule without incurring significant interest charges. With a personal loan, he can pay off his debt with an agreed repayment schedule.
There are benefits to having a credit card such as if you pay it off you have the ability to borrow again and again. In contrast, a fixed personal loan has a set borrowing amount and when it is paid in full the account is closed. With no option to redraw the temptation of getting another loan is reduced.
When incurring debts, it is important to refrain from over-extending yourself financially. As much as splashing cash on a new jet-ski or car may be tempting, stretching yourself financially may make your position worse. Your current focus should be allocating your income to the most important areas of your life and also improving your financial health. Making a budget and sticking it on the fridge is a great way to visualise where your income is being spent as well as having it constantly visible and reminding you to stick to it. Repaying your debts could put you on the pathway to achieving your financial goals and getting that car or personal loan in the future may be a lot closer within reach.