Why to stay cautious when it comes to short-term loans

With back-to-school just around the corner, this can mean additional monthly expenses for a family household. For some, these unexpected and emergency expenses can lead to taking out high-interest loans from finance companies without realizing what they’re getting involved with.

According to the Ohio Credit Union League’s 2018 consumer survey, 30 percent of respondents said they might take out a higher-interest-rate loan, depending on how much of an emergency they found themselves in.

The ability to quickly cover emergency expenses is generally what can make a short-term loan seem like a good solution. According to BankRate, 61 percent of American households would not be able to pay for a $1,000 emergency out-of-pocket. That could make a quick injection of cash seem like an attractive option.

But finance companies don’t give away these loans cheaply. Western Financial, a third-party organization that connects borrowers with short-term lenders online, estimates that a $1,000 loan with a loan term of 12 months would come with a 24 percent interest rate, a 3 percent fee and a nearly 30 percent APR.

High-interest rates combined with a shorter amount of time to pay leave many vulnerable consumers in a cycle of debt. And, predatory lenders have been known to work around legislation to create short-term loan scams that can trap consumers in a cycle of debt, according to a Finder.com article.

Borrowers can also take out loans of any term length and interest rate from tribal lenders based on Native American reservations. The reservations are considered sovereign territories, so these lending institutions don’t need to adhere to state regulations, according to an American Bar Association article.

The U.S. government has taken steps to regulate the small-dollar, short-term lending industry in recent years. In 2016, the U.S. Consumer Finance Protection Bureau instituted a rule aimed at short-term and longer-term credit products typically offered to financially vulnerable consumers. In short, the rule required all lenders to determine the borrower’s ability to pay the loan back. The rule also required lenders to provide notice when they were about to take money from a borrower’s account.

Consumers should know these are not the only options for short-term loans to cover emergencies. Ohio credit unions have consistently helped hard-working Americans reach their financial dreams through unique lending options. Here are a few alternatives to short-term predatory loans.

• Create an emergency fund. The best way to avoid the necessity of a shortterm, high-interest loan is to make sure you have enough saved to cover financial emergencies that may arise. Structure your budget, so you’re putting a small amount per week into an emergency fund. Over time, it will add up to cover at least part of your next unexpected expense.

• Talk to your creditors. If you’re behind on bills, try talking to your creditors about working out a payment plan. Many will consider lowering or delaying payment to help you pay off the debt in full. Make sure you understand any additional fees that may be associated with the new plan.

• Consider a life insurance loan. Many whole-life insurance policies allow for loans as long as you have cash value in the policy. Borrowers have their entire lives to pay the loan back, and debts that aren’t repaid will be deducted from the amount the policy pays out after the holder dies.

• Find a quick way to earn cash. Consider picking up a side-gig or selling unwanted items for extra money that you won’t need to pay back. You may also want to look into apps that can make users extra cash, including Lyft, Uber, Airbnb and Wag.

• Try a personal installment loan. Personal, unsecured installment loans are offered by responsible lenders, including credit unions, banks, and other financial institutions. In contrast to finance company loans, these products feature minimum 90-day repayment periods, installment options, and limits on how often the loan can be renewed.

Credit unions are uniquely equipped to help members understand how to find the best loan for them. To find a credit union near you, visit asmarterchoice.org.