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The actual truth about short term loans

Jun 04, 2014 Sean Albert

Individuals across the globe would agree it's generally best to stay up on current events and situations. Only then can people make informed decisions and live happy lives. This sentiment truly extends to every aspect of an individual's life. Consider it this way - many people likely wouldn't go out and buy a very expensive new computer without doing some research first. What if the overwhelming consensus of consumers who have purchased a particular machine is that it's terrible and not worth the money? There are other options out there, but without remaining informed and smart about decision-making, individuals will likely lose out and end up upset.

This scenario can be extended to the alternative credit market. If they need help financially, people are probably aware that they can ask a bank for a loan. What they may not know is that there are a whole host of options at their fingertips if they research a little more. For instance, they could pursue a short term loan, a car title loan or a number of other legitimate options.

However, in digging a little deeper, these consumers might realize that there is a contingent of people out there who want to do away with this type of financial independence. In fact, national publication US News recently released an article claiming to expose the "truth" about such loans. While it certainly contains facts about how many of these loans work, the piece seems to be a diatribe on the criticisms of the sector as a whole.

Again, for best results, individuals are going to want to hear the whole story, not just a one-sided argument. Think again about buying a computer - just because there's one bad review doesn't mean there aren't a whole host of people who have had a lot of success using it.

Interest rates aren't outrageous
While there have been reports of some lenders charging exorbitant fees, if borrowers do their homework and look into legitimate alternative finance companies, they'll realize that this isn't common. While US News claimed that it's "almost impossible for borrowers to pay off their balance on time," that simply doesn't make any sense. After all, why would millions of consumers continue to pursue this option with great satisfaction if that were the case?

In reality, The Pew Charitable Trusts reported that about 12 million American short term borrowers spend $7.4 billion each year at 20,000 storefronts and many websites.

It's important to learn the reasons why short term loan businesses have to charge fees. It's the same reason banks do - they have to make a profit to be able to contend with things like overhead costs and payroll. Moreover, they're taking a significant chance, because if a loan isn't paid back, the lender will essentially eat the cost.

Not many people default on title loans
Consumers should know that another form of short term loans - those that involve borrowing against car titles - is just as legitimate. In this case, individuals also get to retain possession of their vehicles so they can continue to live and work as normal while keeping their heads above water.

Again, US News paints this as a bad decision, suggesting that the majority of borrowers aren't able to pay these loans back and either have their cars taken away or have to renew the loans. That's untrue, not only because a growing number of states are developing laws prohibiting this, but according to a recent study from Vanderbilt Law School, less than 10 percent of vehicles are repossessed.

"Repossession affects few borrowers, and our evidence indicates that most borrowers will not lose their only way to work because of repossession," explained Associate Professor of Law Marta Skiba.

Rumors aren't helpful: Look at the facts
Much of the time, critics of the short term loan industry speak in generalities and even work rumors into their arguments. This is a serious mistake, because these actions could serve to mislead or confuse consumers who would legitimately benefit from taking out such a loan.

For instance, Compliancy Services, in a subsection entitled "The situation," reported that there have been rumors that individuals who have taken out loans weren't aware of the interest rates at that time, and subsequently drove themselves into a financial hole. However, this claim wasn't backed up by hard facts.

In actuality, a survey of more than 1,000 respondents released by the Community Financial Services Association of America revealed that 92 percent of borrowers found the cost of their short term loans was either better than they'd expected or exactly what they'd foreseen. Approximately 96 percent said the same about the legal terms of the decision. Moreover, 93 percent of borrowers noted they'd "carefully weighed the risks and benefits" before agreeing to a loan.

"Our survey findings reveal almost all borrowers understood the cost of their loans and how long it would take to repay them," stated Harris Interactive Chairman of the Harris Poll Humphrey Taylor.

This may be a case of lawmakers and other critics misunderstanding the situation or underestimating consumers. Regardless, it's up to individuals and short term lenders to align themselves against detractors and attempt to educate everyone about the truth within the sector.