Understanding Short-Term Debt
Short-term debt, such as cash advance, payday loan and other, similar financial instruments, is designed and marketed as a convenience product. The lenders that provide these payday loans allow their customers to take out a small principal balance, oftentimes as little as $50, which is mostly used to pay off bills or to make small purchases.
These small payday loans online are financed with a fee which is usually represented as interest added to the money lent. Because the loan is very short-term, the rate of interest is high. Interest is calculated by multiplying the rate by the time for which the money is financed, which results in the financing fees for these loans being quite low. This model is how payday lenders stay in business as charging small interest rates would be not profitable for them due to the very small loans they offer. Essentially, their service is dependent upon their clients being able to borrow a useful and manageable amount of money rather than an amount that results in very long-term obligations with the company.
Short-term debt is best managed by paying off the entire amount as quickly as possible. The loans are written in such a way that customers are not penalized for an early pay-off and, indeed, customers are rewarded for handling the debt in this manner. Because interest accrues daily, there is no motivation for an early payoff fee or penalty involved with this type of lending. The company that provides the payday loan makes their money from fees attached to the loan so the customer is free to pay off the loan as quickly as they’d like.
Short-term debt is usually available for very small amounts of principal. These loans are not intended to be used for large purposes but, rather, are a convenience instruments that allows immediate loans which only constitute a state-regulated percentage of the borrower’s projected income over the next couple of weeks. The term “payday loan” essentially refers to the fact that the borrower’s pay is the principal means by which the funding amount is determined, rather than the loan being dependent upon the borrower’s credit history and credit score, which is the convention for determining a customer’s eligibility for long-term debt.
These loans are generally able to be extended for a longer period of financing by paying the financing fee for another term of lending. State regulations will determine how many times this can be done and, at some point, the loan will have to be paid back in full. It’s best to start managing this debt by investigating one’s state laws that apply to this sort of borrowing before taking the loan.
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