The Dangers of a Short Term Loan

All financially conscious individuals have the tenet within them that a payday loan/cash advance is a very detrimental financial tool. Recently a  bigger picture question arose- what if I need a 30 day payday loan to take advantage of a business opportunity?

(Note: This article is considered outside-the-boxing thinking because we are all aware of the negatives that are associated with cash advances.)

Payday loan companies are known to have some very clever marketing. I know that I have used a fairly negative connotation when discussing payday loans. I will not change my stance on them. I want all 20 something to learn how to avoid the cash advance trap. However, I am willing to discuss the concept of a 30 day payday loan and the usage of a cash advance.

Where is this 30 day payday loan discussion coming from? After my last article where I shared my thoughts on payday loan marketing tactics, a Studenomics reader posted an interesting comment which led to a very thought provoking conversation through email. Due to privacy issues and respect for my readers I will not go into the details of what Terry and I discussed. I’m willing to post Terry’s previous comments on the 30 day payday loan since they were made public under the discussion for my post on payday loan marketing tactics.

Terry:

Okay, I live on a poverty-level income, so I don’t think I have a spending problem.

Now I have two money-making issues:

1) I see some opportunities to buy some things at approx one-half their value and resell them on eBay for full value. (e.g. buy things for $10-$25 and sell for $20-$50)

2) In order to successfully execute #1 above, I need some computer upgrades (e.g. I’d have to post pictures of my items)

So in order to take advantage of these money-making opportunities, I need a little startup capital, which I can’t quite build on a poverty-level income.

When I shared my feedback and inquired for more details, Studenomics reader Terry responded with:

I’m thinking I’d need: (cost estimates high end to avoid overruns)

1) home internet service $40/mo + maybe one-time $50-$75 for modem/router

2) scanner $25

3) basic used windows computer (for compatibility with #1 and #2) $50

So I think a $200 30-day payday loan would be sufficient to get me started. I already have $500 of things to sell, which would repay the loan and provide cash for future purchases for resale.

I can’t think of a way to get started before I need to borrow money, since I’d need to take and post pictures and can’t do that from a library computer.

Before any decisions can be made or any forms can be filled out, this one question needs to be answered:

Do you really need this 30 day payday loan?

I realize that this question is difficult to answer. This is why I have listed some thoughts below to help you decide if a short term loan is right for your situation.

If you must use a short term loan then please be very careful. All of you reading this are intelligent grown up folks that are making a conscious effort to make correct financial decisions. Unfortunately, some of are friends and peers are not in the same frame of mind at this point in life. If you or someone you know is looking into a 30 day payday loan, the worst case scenario must be taken into consideration. Whenever I make an investment I think of the absolute worst thing that can happen, which is usually the possibility of losing all of the money invested. If you lose the money you borrow, will you be able to come up with the funds to pay off your new found debt?

Only under extreme circumstances should you consider a short term payday loan. Following the previous paragraph it would only make sense if I further elaborated on the severity of a short term loan. The risk you potentially take on through acquiring a payday loan to use for an investment is exorbitant. Borrowing the money signifies that you do not have liquid cash available at the moment. If the investment flops then you might have to borrow even more money to pay off your original 30 day payday loan. The potential reward needs to greatly out weigh the risk that you take on with your short term loan.

Will this 30 day payday loan be used for a once in a life time opportunity? As satirical as it may sound there are circumstances that are very rare that come to us. Whether it is an excellent business opportunity or the ability to purchase a desired item at a large discount. A friend of mine was saving up to buy a car he has had his heart set on for a long time. He found a similar model on sale and the owner was looking to get rid of it ASAP. Since my friend knew that this was a rare chance he took a short term loan to help him buy this car. At the end of the day, he paid off the short term loan and purchased this car at a much lower price than expected.

Please remember that payday cash advance loans are very expensive. Quick personal loans from a buddy are one thing but when you walk into an established loan-providing store you should expect to pay a pretty hefty premium on this money. I did some research and came up with varying percentage rates depending on the area. Simply put- the interest on a 30 day payday loan is much more than you could ever expect to earn for your money at your local bank.

There isn’t any affiliate links in this post and I am not trying to promote the idea of a 30 day payday loan. I just want to be as empathetic as possible and I want you guys to know that there is sometimes more to the situation than is present on the surface. If someone you know is looking into obtaining a short term loan I would not be so quick to judge them.

As the saying goes, “To effectively communicate, we must realize that we are all different in the way we perceive the world and use this understanding as a guide to our communication with others.” (Tony Robbins, and yes I promise to never use a corny quote again.)

Okay, I live on a poverty-level income, so I don’t think I have a spending problem.

Now I have two money-making issues:

1) I see some opportunities to buy some things at approx one-half their value and resell them on eBay for full value. (e.g. buy things for $10-$25 and sell for $20-$50)

2) In order to successfully execute #1 above, I need some computer upgrades (e.g. I’d have to post pictures of my items)

So in order to take advantage of these money-making opportunities, I need a little startup capital, which I can’t quite build on a poverty-level income.

2 thoughts on “The Dangers of a Short Term Loan”

  1. I’ve never considered a short term loan like this for a money making opportunity. It is definitely a sound principal just like companies raising capital or even using leverage to take advantage of business opportunities.

    The difference is that businesses have very effective ways (given stable economics conditions) to predict what kind of returns they can get from expanding their business. Individuals have a much harder time of this. Of course that doesn’t make it less of an opportunity, it just increases the uncertainty and risk.

    In which case I totally agree that while you may have found a useful way to use short term loans, you should still be very careful and even consider alternatives. For example, maybe it would be better to use a pawn shop to get a loan backed by some of your personal items so the downside risk is only losing those items rather than getting into the short term loan trap.

    1. Thanks for your thoughts Edwin. I agree in the sense that we can make as many calculations as humanly possible but there is no guarantee. A major company can use a comprehensive NPV analysis of a major investment, while we have to rely on basic information that is given to us.

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