How to repay your short-term loan

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Can you afford that loan you’re about to take out?

With APRs often topping 400%, payday loans are one of the most expensive types of financing out there. And the cost can more than double if you’re unable to pay it back the first time it’s due. Having a plan to repay your loan can help you save on loan fees and avoid getting trapped in a cycle of debt.

How do I repay my short-term loan?

How you repay a short-term loan depends on the type you have.

  • Payday loans and single-payment title loans are typically due all at once on your next pay day, within 14 to 30 days.
  • Installment loans come with multiple payments, which usually span over three to 18 months.

Rolling over a payday loan

More than 80% of Americans who take out a payday loan roll it over at least once, according to the Consumer Financial Protection Bureau (CFPB).

If you can’t repay your short-term loan when it’s due, many payday lenders offer the option to renew or roll over your loan. When you renew a loan, you typically have to pay the same fees or interest that would come with taking out a new loan.

Renewing your loan just once can double its cost and make it even more difficult to pay it off in the future. Many borrowers get trapped in a cycle of debt by rolling over their loans. For this reason, many states have limits on how often you can renew short-term loans — if at all.

How do I stay on top of my repayments?

Having a plan to pay off your loan before you take it out is key to paying off your loan on time.

Know how much you can afford

What’s affordable when it comes to a payday loan? There’s no definitive percentage that can be given to say that if 20% of your income is left after bills are taken out and your repayment is made, it will be enough to live off of. Ask yourself these questions to make sure your short-term loan is affordable:

  1. How much are my monthly bills? Write down and add up your rent or mortgage repayments, utilities and other monthly expenses.
  2. How much are my living expenses? Consider how much you need for groceries each week, gas for your car, a few dollars for that morning coffee and other living expenses.
  3. How much of my paycheck do I have left? Subtract your monthly costs from your monthly salary after taxes. If you have enough left to cover your short-term loan repayment, your loan is affordable.

Organize a budget

Having a budget is an often overlooked step when it comes to short-term loans. This might be because of the nature of payday loans. They’re designed as a solution for people who need quick access to funds, so you’re likely more interested in seeing if you can actually get the money rather than working out if you can afford it first. Here’s how to make sure your loan fits into your budget:

  1. Look at the repayment terms and fees offered by the lender.
  2. Work out how much your repayments will be based on how much you’re looking to borrow.
  3. Consider your monthly expenses and weigh where you can cut back to make your repayments comfortably affordable.

Let’s take a look at an example of how to calculate costs. Say you were looking to borrow $1,000 with a three-month term at a 300% APR. Since it has a three-month term, you would pay it off in three installments. With interest, this works out to $452.77 per month.

How to create a budget for yourself

Zoe's short-term loan

Say a woman named Zoe wanted a short-term loan of $350. She compared her options and found a lender she could qualify with that offers a month-long term with repayments automatically deducted from her bank account.

Being paid biweekly, this meant on each pay date, $217 was direct debited out of her account to repay her total loan amount of $434.

Since Zoe was paid $500 every two weeks, this only left her with just over half of her usual pay to manage her day-to-day expenses. This was a big jump in what she usually had to spend, and so she found it difficult to manage without a plan. She decided to be more organized and make a budget if she had to take out a loan again.

Tips to manage your loan on any income

Whether you’re earning $30,000 or $130,000, there’s a way to manage your budget and repayments on your income. Keep the following in mind when it comes to managing your loan:

  1. Make your repayments on time. Not doing this will see late repayment and default fees added onto the amount you owe. This can send you further into debt.
  2. Get in contact with your lender if you’re having trouble making repayments. This can help you avoid the fees mentioned above that you’ll be charged for paying late. Lenders are usually willing to help and able to sort out payment plans with you if you run into trouble, so they should be your first point of call.
  3. Only apply for a loan amount you can afford. Before you submit your desired loan amount, work out the minimum income you can get by on after your loan repayments. Consider the fees you’ll need to pay and how even a slightly higher loan amount will increase your repayments.
  4. Don’t take out several short-term loans at once. If you already have a short-term loan and have not completely repaid it, do not apply for another loan. This can make your repayments unmanageable and send you into a debt spiral that can be difficult to get out of.

Payday loans can be a convenient form of financing to apply for, but you need to ensure the repayments will be manageable before you apply.

By working out a budget, organizing your finances and only applying for as much of a loan as you need, you’re on the way to managing your loan and getting it repaid on time, comfortably.

Bottom line

A short-term loan can quickly get expensive if you’re unable to pay it back on time. While they’re faster than most other types of financing, taking the time to consider what you can afford can help you save and avoid getting caught in a cycle of debt.

Learn more about how short-term loans work with our guide to payday loans.

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