For many, short term loans can seem like a godsend when they are financially crunched. With no money to pay the bills people would rather borrow expensive, high-interest loans rather than deal with the depression that comes along with getting utilities turned off, creditors hounding them or a default on their credit history.
However these short term loans come at a price. If one misses a payment on them the interest rate is enormous, sometimes large enough to warrant taking another loan out to pay it off. The consumer then falls into the predatory lending trap, where one small short term loan turned into a huge debt. Now on top of the initial loan, they are repaying mostly interest on the loan, sometimes up to 146% of what the initial principal was!
For most consumers this sounds like a nightmare. Missing repayments on expensive loans can make a bad situation turn into a grave one. As the initial loan came with a very high APR, if the consumer does not pay off the full balance, a percentage of interest to the loan is applied. With expensive loans, such as "payday" loans, this APR can be as low as 150% to as high as 400%. If the consumer misses a payment, then the full interest is charged to the balance as well as more late fees and non-payment fees. As it turns out, the consumer can end up owing more than double what he or she borrowed in just one missed payment!
The key to avoiding these fees and late penalties is to make payments on any loan, no matter how small. Talking with creditors about ones situation may indeed grant some leniency and may prevent the loan from going into default. By simply talking with the lending company and working out a payment plan one can avoid calls from creditors asking for payments and avoid the pain and embarrassment that comes with a default.
There are many agencies available for debt consolidation and consumer financial help, however these should be used with caution. Many offer bankruptcy deals for cheap, however a bankruptcy could ruin ones financials and destroy any chance of future financial help. Some non-profit groups offer support for consumers in this situation and offer free budget planning advice to get help in paying off these loans.
