Surprise Costs

• The main reason that people resort to short-term loans is when they are surprised by an unexpected bill or charge. If a person doesn't have any money saved up to cover an unexpected cost, a short-term loan may seem like the only option. The people who resort to the agencies that provide short-term lending are also often those who do not have bank accounts or other means of ready credit to use.
  
  

Snowballing

• The major problem with short-term lending is the snowball effect that can occur. The interest rates attached to short-term loans can be very high, especially if they're not from a bank or credit union. If an individual can't pay back the loan on time, he may find himself in even more debt from the interest. In order to cover the costs of one loan, some people take out another, which can start a vicious circle.
  
  

Credit Unions

• In order to avoid interest rates that may be as high as 400 percent elsewhere, many people have taken advantage of local credit unions. Credit unions are owned by their customers and can be found in almost every area. These institutions regularly give out short-term loans with reasonable interest rates and make an effort to help those they lend to in making a payment plan. Unfortunately, many don't even know the existence of these institutions.
  
  

Caveat

• Banks also offer short-term loans; however, you should look closely at the terms of the loan for any short-term loan, including those from a credit union. The terms may be as disadvantageous as those from a payday loan company. You may be better off borrowing from your 401k if you have one.