Why is short-term debt so expensive?
When you take a look at your overall financial position it will likely become very clear that the shorter the term of a financial arrangement the higher the potential interest charge. So why is short-term debt so expensive?
The very simple answer to this question is that short-term debt is a very difficult situation to forecast for a lender because the debt could be repaid tomorrow, next month, next year, etc. When you consider that any financial company needs to give itself the best opportunity to make a profit from this "short-term loan" this is why short-term debt attracts the highest interest charge.
Credit cards are a perfect example of this scenario because if you pay off your balance at the end of every month then the credit card companies are unlikely to make much money from you. However, if you let your credit card debt build-up this would attract significant interest charges and give financial institutions a return on their investment.
Even though in some ways it can go against the general consensus, if you are in financial trouble you are sometimes better off looking towards longer-term debt arrangements such as personal loans. Assuming your credit situation is not beyond repair you can structure these arrangements to take as much short-term pressure off your budget and pay a smaller monthly payment over a longer period. However, if you are considering a change in your financial affairs you should take professional advice.
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