Do short-term loans cause bankruptcy? | finder.com
short term loans and bankruptcy

Do short-term loans cause bankruptcy?

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They may have a bad reputation, but there’s more to it than a black or white answer.

Short-term loans are designed to help borrowers meet their financial burdens until their next payday. However, given their high interest rates and quick turnarounds, they can often lead to a debt trap that may difficult to get out of.

Can short-term loans lead to bankruptcy?

It’s hard to know to what extent short-term loans play in bankruptcy, but statistics show that 11% of debt incurred by individuals seeking to file bankruptcy include a past short-term loan that has gone into default. But in general, a single short-term loan isn’t likely to cause you to go bankrupt.

However, borrowing for multiple short-term loans may be a sign of deeper financial instability. While they can provide some breathing room in an emergency, they can also overtake a paycheck that’s already spread thin. This is known as a debt cycle, which can be very difficult to find a way out of — thus leading many people toward bankruptcy.

What is the link between short-term loans and bankruptcy?

When borrowers who are already struggling with monthly expenses rely on short-term loans as a source of instant cash, the result is often more dire financial situation. What’s perceived as a one-time payday loan can easily turn into a long-term pattern of taking out high-interest short-term loans to pay steep finance charges and fees on previous loans.

According to a 2014 Consumer Financial Protection Bureau study, four out of five payday loans are rolled over or renewed in 14 days. And only 15% of borrowers pay their loan off on time without taking out another loan during that 14-day period. This “debt spiral” can lead a borrower to file for bankruptcy to stop the cycle.

Compare your short-term loan options to find a lender with competitive fees

Rates last updated March 24th, 2019
Unfortunately, none of the short term loan providers currently offer loans in your state. Learn more about short term loans in your state to find an alternative.
Name Product Product Description Max. Loan Amount Turnaround Time Requirements
OppLoans Installment Loans
Installment loans with competitive rates from a top-rated direct lender.
$5,000
1 business day
Must have direct deposit and meet minimum income requirements
Jora Installment Loans
Installment loans with repayment terms up to 30 months, depending on your state.
$2,600
1–2 days
Must have an active checking account, regular source of income and email address.
LendYou Short-term Loans
Apply online with this loan-connection service offering unrestricted short-term loans with fast turnaround.
$15,000
1 business day
You must be a US citizen or permanent resident, age 18+ and have a regular income.
CashUSA Installment Loans
A connection service for quick cash loans up to $10,000.
$10,000
As early as 1 business day
Must have a monthly income of $1,000+ after taxes and valid checking account.
CashNetUSA Loan
Apply for a short-term loan with an easy online application and dedicated customer service.
Varies by state
1 business day
You must be a US citizen or permanent resident, be at least 18 years old and have regular income and a bank account.
ACE Cash Express Short-term Loans
Quick payday, installment and title loans with no prepayment penalty and a 72-hour satisfaction guarantee. Funds can be loaded on an ACE Elite™ Visa® Prepaid Debit Card.
Varies by state
Generally receive the money the next business day
Must be 18+ years old, have a steady source of income and a checking or savings account. Must not be a debtor in bankruptcy.
LendUp Payday Loans
LendUp offers $250 loans for first-time borrowers. Good credit is not required. Visit the site to see more details for your state.
$250
generally receive the money the next business day
Be 18+ years of age and have a checking account that can accept electronic transfers.

Compare up to 4 providers

What does it mean to default on a short-term loan?

When you default on a short-term loan, you’ve failed to make payments according to the contract you signed with a lender. Many lenders are forgiving, offering payment plans and extensions. But if you’re unable to repay your loan, you may default — which could lead to extra fees and even a visit to the court if your lender pursues legal action against you.

How to avoid defaulting on a short-term loan

Before taking on a short-term loan, work out a budget that ensures you can afford the loan within the repayment terms. If you don’t understand the terms and conditions fully, ask as many questions as you need until you do.

Keep in mind that a short-term loan should be a last resort for true financial emergencies only. Before you take on this high-cost financial product:

  • Contact your creditors regarding existing loans. Your creditors or loan servicer may be willing to work with you to extend your due date or allow you to pay off your debt in installments.
  • Call your bank or credit union. Banks and credit unions offer small loans that could take the pressure off your financial strain, depending on your account’s standing and credit history. One common option is a payday alternative loan from federal credit unions.
  • Seek assistance from a community program or nonprofit. These organizations and programs are a great resource to help you develop a budget, obtain credit counseling and even tap into financial advances.
  • Consider your credit cards or a pawn loan. Your credit card’s fees and terms may be better than what you can find with a short-term loan. As may a pawn loan, which allows you to use something of value for collateral until you can pay back what you’ve borrowed.
  • Ask friends and family. Whether it’s a parent or a good friend, explaining your situation to a loved one and asking if they’re willing to give you an advance is a quick way to avoid a short-term loan. Plus, these usually come with no additional fees or interest.

You may also want to consider a few other short-term loan alternatives before jumping into a loan contract.

Bottom line

Short-term loans don’t necessarily lead to bankruptcy, but if you find yourself borrowing multiple loans just to keep your head above water, it might be a sign of deeper financial problems.

If you know you need a short-term loan, our guide on payday loans can help you compare your options so you can make an informed decision.

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2 Responses

  1. Default Gravatar
    DavidDecember 17, 2018

    I been in the hospital for two weeks and can’t make my schedule payment.

    • finder Customer Care
      JhezelynDecember 19, 2018Staff

      Hello David,

      Thank you for your comment.

      Sorry to hear about your hospitalization. Please contact your creditor to see if they will charge you a late fee and how you both can agree on the repayment term.

      Should you wish to have real-time answers to your questions, try our chat box on the lower right corner of our page.

      Regards,
      Jhezelyn

US Payday Loans Offers

Important Information*
CashNetUSA Loan

Apply for a short-term loan with an easy online application and dedicated customer service.

Check into Cash Payday Loan

With 1,000 branches in 30 states, get $50 to $1,000 in days from this direct lender.

OppLoans Installment Loans

Installment loans with competitive rates from a top-rated direct lender.

LendYou Short-term Loans

Apply online with this loan-connection service offering unrestricted short-term loans with fast turnaround.

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