Small cash loans can come in the form of a payday loan, a personal loan, or cash borrowed against your credit card. If you’re short on cash, you may be considering one of these options to bide you some time. While there may be strategic reasons to do so, generally it’s not an advisable practice.
Here are 7 reasons when taking out a small cash loan is a bad idea.
1. You don’t have good financial habits
Without established financial habits, you’ll be tempted to delay repaying your loan. Eventually, interest on your loan will add up making it a costly decision. Additionally, you may miss a payment leading to late fee payments and poor reporting by your lender to the credit bureau.
2. You have a low credit score
The lower your credit score, the higher the risk you are viewed to be by the lender. As a result, you’re going to pay high-interest rates and may require a cosigner. Generally, if a bank is requiring a cosigner, this is a sign you’re not qualified on your own. Take this as an opportunity to re-evaluate the need for a cash loan, and look for alternative options.
3. To pay for something unnecessary
If you’re taking out a cash loan to help pay for a vacation, a wedding, or anything that can be postponed, it’s a bad idea. A better alternative would be to develop a plan to save the money over time. Then enjoy your event without the burden of future payments and the cost of interest.
4. If you can’t afford the payments
It may seem like a good idea to cover a short-term short-fall in cash with a small loan. Unfortunately, reality strikes and payments come due. If you can’t afford to make the payments on a loan, it’s never a good idea. A band-aid will turn into a strike on your credit report, which will have a long-term effect on future borrowing privileges.
5. When you’re consistently using it in place of an emergency savings
Emergencies come up. Unexpected car repairs, home repairs or medical bills are an inevitable fact of life. Even a small emergency savings fund can prevent you from taking out a loan and put you on the path to improving your finances and finding financial freedom. If you find you’re consistently taking small loans to cover emergency bills, you’ve likely developed a bad habit. Take a step back and evaluate if you are procrastinating putting money into savings because you know you can rely on a loan.
6. You have the option to borrow against your own assets
Borrowing against your own assets has an upside. A HELOC generally comes at a lower interest rate than a payday loan, a personal loan, or a credit card loan. However, at the time of this post, if you itemize deductions on your tax return, there may be some costly tax implications if you don’t spend the proceeds on real estate, so make sure to factor this into your decisions, and check with your CPA.
7. You’re using it to consolidate lower interest debt
If you’ve got multiple loans, you may feel disorganized and overwhelmed with the number of payments going out each month. In such a case, you may be tempted to consolidate into a single loan to simplify your payment process. However, ensure you evaluate the interest rate on the new loan to confirm it’s not higher than the rate on your individual loans. If it is, stick with multiple loans.
What are your thoughts about taking out small cash loans? Are you for them or against them? Let us know in the comments.