3 Instances a Short Term Personal Loan is a Good Idea

Short term personal loans have very high interest rates and carry a large risk to the borrower. They are considered among the costliest forms of financing available, and most financial advisers would tell clients not to take short term personal loans. Most of the time, using a credit card or taking a home equity loan will result in a better financial result. However, there are some unique instances when short term personal loans are worth their high price tag.

#1 Building Credit

Short term personal loans that are not secured against an asset are very high risk. Whenever a loan is high risk, it offers a greater potential affect on a credit score. This goes both ways: defaulting on a high risk loan can be detrimental to your credit. Paying off a high risk loan, on the other hand, can provide an immediate credit boost. This is particularly beneficial with short term loans because you do not have to wait very long to get the credit boost. A short term loan can mature in as little as a few months. Some borrowers will choose to take a short term personal loan in the years leading up to the time they apply for a mortgage for this reason. Even if they do not need the funds, they are willing to fork over the high interest payments because a high credit score can help them save on interest down the line.

#2 Obtaining Bridge Financing

Businesses are the most common users of bridge loans. These loans allow for some flexibility while permanent financing is arranged. There are some instances where individuals may need bridge loans as well. If you purchase a piece of property to build a home on, you may need some cash to buy the land, another loan to build the home and a permanent mortgage. The loan process to get each of these steps arranged is a hassle. Electing a short term personal loan to carry through one of the steps while the permanent mortgage is arranged may be necessary.

#3 Avoiding Default

If you are approaching default on one of your loans, you should not necessarily take out another loan to pay the bills. This can lead to a large cycle of debt and cost you thousands of extra dollars in interest. However, you may be in a position where you exhausted all other options and cannot find cash to avoid foreclosure on your home or your automobile. When compared to pay day loans, which many people use to pay bills, short term personal loans have much lower interest rates and lower risk of default. Pay day loans are almost never a good idea. Instead of opting for these detrimental forms of financing, it is better to just take the high risk personal loan. You will have the option of at least working with your standard bank or other traditional lender instead of seeking a pay day lender. Traditional lenders, even if they are high risk, are more regulated than alternative lending institutions.

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