Home / Loans / How to Preclude the Possibility of Falling Prey to Short Term Borrowing

How to Preclude the Possibility of Falling Prey to Short Term Borrowing

Short term borrowings refer to the loans or the credit availed whose principal amount is payable within a year. Such credit sources are usually unsecured, i.e., they don’t require any collateral or security but the interest rates are pretty high just in resemblance to a skyscraper. Such credit sources include credit cards, cash cards, cash advances, payday loans, etc.

Short term credit, if used effectively, can be very constructive in a long duration but if used spontaneously without any planning, it can make you fall victim to the vicious circle of default payments, late payment fees, over limit or overdraft charges and harassment by the creditors. It is not something to be decided like a shot. Hence, it is very crucial to plan out your expenses and paying capacity before you avail any such credit.

Look into Your Expenses and Create a Budget

A budget is a summary of intended expenditures along with proposals for how to meet them. To prepare an effective budget conform to the following steps:

  • Calculate your monthly income from all sources-direct and indirect.
  • Analyze the expenses and bifurcate them in following two categories:
    • Obligatory or crucial expenses like rent, interests, etc.
    • Discretionary expenses like shopping, restaurants, etc.
  • Evaluate the large sums you would require in future for expenses like festivities, gifts, etc., and create a separate fund for them. Also, create a separate fund for unforeseen expenses like healthcare.
  • Break down the income and allocate the money first for obligatory expenses and then for the funds created. Save a certain percentage of money left and invest it in a scheme with assured return like fixed deposits or recurring deposits. Lastly, satisfy your needs by fulfilling discretionary expenses but remember to spend judiciously and save wherever possible.

However, life is not as easy as it seems. There are certain situations when a person despite all his savings is in dire need of some quick money. Even if reluctantly, there is no other option but to borrow. Therefore, it is very crucial to know how to combat the deplorable consequences of short term borrowing.

Payback the Debt Efficaciously

  • Create a fund in your budget to payback the amount as soon as you receive it. This would enable you to pay the principal on the due date with ease.
  • Rather than paying monthly, make half payments once in two weeks. This won’t affect your budget much and will enable you to make thirteen payments each year as opposed to twelve monthly payments. It would help you reduce the debt rapidly and cut down on interest expenses.
  • Pay off the high interest carrying debts before the low interest carrying ones to prevent continuous high interest payment obligations.
  • Reduce your discretionary expenses and try to clear the debt as soon as possible.
  • Last but not least, be patient and think before you do anything as your every action would cast an impact on both your present and the future.

Prevention is always better than cure. Always be handy with buffer cash to deal with any unanticipated circumstances. If you have no option left but to borrow, then be serene while taking your decisions. Plan and pay your debts effectively.

About Stephanie

Stephanie Rosen is a financial market analyst and a blogger. She writes about stock market and investment opportunities around the world. You can find her latest ideas on here. Just signup our news letter today and receive regular updates of Stephanie.