Finder is committed to editorial independence. While we receive compensation when you click links to partners, they do not influence our content.

Do short-term loans cause bankruptcy?

They likely won't, but don't let one trap you in a cycle of debt.

Avatar
Aliyyah Camp
Updated
Fact checked

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 short-term loan loans

Data updated regularly
Name Product Filter Values Loan amount Turnaround time Requirements
OppLoans Installment Loans
OppLoans Installment Loans
$500 to $5,000
1 business day
Direct deposit, meet minimum income requirements, live in eligible state
Comes with the option to change your due date so you won’t fall behind on repayments.
Go to site
More Info
CashNetUSA Loan
CashNetUSA Loan
Varies by state
As fast as same business day
Regular source of income, bank account, US citizen or permanent resident, age of majority in your state
Sign up for its discount program to get access to coupons and deals on everything from dining out to tax services.
Go to site
More Info
Stilt
Stilt
$1,000 to $25,000
2 to 3 business days
Be employed, have a US bank account, live in a state where Stilt operates, hold one of the following visas: F-1 and OPT, H-1B, H4, O-1, L-1, TN, J-1, DACA or be a US citizen.
No green card? You could still qualify for a personal loan.
Go to site
More Info
Fast5kLoans Short-term Loans Connection Service
Fast5kLoans Short-term Loans Connection Service
$100 to $35,000
As soon as the next business day
Regular source of income, verifiable bank account, US citizen, ages 18+
Get connected with multiple lenders you might qualify with — even if you have bad credit.
Go to site
More Info
LendYou Short-term Loans
LendYou Short-term Loans
$100 to $2,500
Same business day to 1 business day
$1,000+ monthly income, direct deposit, US citizen or permanent resident, ages 18+
Get offers from potential lenders in minutes by filling out just one online form.
Go to site
More Info
loading

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.

Frequently asked questions

More guides on Finder

Ask an Expert

You are about to post a question on finder.com:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder.com provides guides and information on a range of products and services. Because our content is not financial advice, we suggest talking with a professional before you make any decision.

By submitting your comment or question, you agree to our Privacy and Cookies Policy and finder.com Terms of Use.

Questions and responses on finder.com are not provided, paid for or otherwise endorsed by any bank or brand. These banks and brands are not responsible for ensuring that comments are answered or accurate.

2 Responses

    Default Gravatar
    DavidDecember 17, 2018

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

    Reply
      Avatarfinder Customer Care
      JhezDecember 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

      Reply
Go to site