Short-Term Loans: Worth the Debt?

Short-Term Emergency loans, otherwise known as payday loans, are often seen as quick fixes to financial problems when times get tough. What are the risks of taking these short-term loans? Are the risks worth the benefit gained from them?

The Risks of Payday Loans

The risks of payday loans are multi-fold. The most obvious risk is clear and upfront in the name of the product; it is not a payday gift, it is not a payday dowry, and it is not a payday grant — it is a payday loan, and inherent in any loan is a degree of risk. Given the financial troubles and vulnerabilities of those who most often take out these types of loans, the risk that the loan will not be repaid is not an insignificant one.

Once one payment is missed on a payday loan, the troubles start to accrue for the borrower. Checks start to bounce, loans have to be taken to repay other loans, and the financial mess that catalyzed the process of taking out payday loans becomes much deeper and stickier.

A Cost-Benefit Analysis

What is gained from taking out a payday loan? Short-term relief of financial worries. If one is about to go broke, but can get an easy, free check from the payday loan company, then it starts to make sense for that person to take out a short-term loan with a multi-hundred-percent Annual Percentage Rate (APR) to relieve that anxiety.

Bills are paid, debtors are happy, but this relief is naturally short-lived, as the payday loan company soon comes calling. What happens when this borrower, who is already in a financially vulnerable position, doesn’t have the funds in a week or two to repay the loan company?

Evidence for the hypothesis that payday loans exist solely to quell short-term anxieties at the expense of long-term financial health lies in the aforementioned fact that the APR for these loans is so gargantuan. If any credit card tried to sell a potential borrower on a 400% APR, they would be laughed away.

The fact that most people do not look at payday loans with reference to the APR lends credibility to the idea that these borrowers are simply not thinking about the long-term effects of their financial actions.

Do Short-Term Loans Make Sense?

Of course, the decision to take a payday loan or not is one that is personal and incumbent on a number of factors, including the dollar amount involved, one’s comfort with risk, and one’s ability to get outside help in an emergency situation.

The fact remains, however, that for most people and situations, the level of risk involved with these types of loans does not make rational sense. If one minor detail goes wrong, and the borrower is in a financially vulnerable situation, these very short-term loans with high interest rates could be potentially ruinous.

The goal of debt is to increase the quality of life. A type of loan, such as payday loans, which has a huge potential for ruining the quality of life and trajectory of one’s future should be looked on with nothing less than skeptical eyes. It is not worth ruining financial freedom for relief from anxiety, no matter how satisfying that relief may seem in the present.

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