Small loans are aimed at meeting small expenses. They have gained popularity ever since online lending institutions entered the financial market, but they were designed to help tide you over during financial emergencies. Unexpected expenses can catch you by surprise at any time, and push your panic button when you do not have a safety net to fall back on.

Everywhere, you will come across expert guidance that you must have at least three months’ worth of living expenses. Many of you even try all the harder, and yet their efforts do not pay off much. There are various emergency situations when you will have to dip into your savings. For instance:

·        You lose your job.

·        You come across a medical emergency.

·        You have to go abroad to attend someone’s wedding or funeral.

·        Your electronic gadget has begun acting up out of nowhere.

Small loans do not let you borrow a larger sum of money. Lenders cap on €1,000, and they also expect you to pay it off in full in one swoop. Because the maximum borrowing limit these loans offer is up to €1,000, it does not insinuate that you will qualify for that at every turn. Your credit score and repaying capacity will be thoroughly checked. It is most likely that your lender decides to restrict the amount.

Small loans are aimed to fund the gap

As they are suitable for funding small emergencies, lenders do not expect that you will not have an emergency cushion at all. These loans have been decided to help fund the gap in your savings. For instance, if you stashed away €10,000 for your wedding, but you find out that all arrangements cost you €12,000.

Small loans can help you fund the gap worth €2,000. However, this amount will be offered only when you have a strong repaying capacity. In this case, your lender will put you on an instalment plan. In case your credibility is called into question, your lender will lend you less than that.

Why should we rely on small loans for emergencies only?

You can use small loans for various types of emergencies, but people often use them to meet discretionary expenses. For instance, you use them to shop for clothes, footwear or any present to gift your friend or co-worker. Although lenders do not discourage you, small loans are particularly ideal for small emergencies only. Here is why you should not use them for any reasons other than small emergencies:

·        They are expensive

Small loans carry very high interest rates. Borrowing money is not considered a good thing. It reflects that you are bad at managing your finances. Another reason that makes a small loan in Ireland expensive is your poor credit rating.

Although it is not set in the policy that good credit borrowers cannot apply for small loans, the trend has revealed that such people never found the need to use these loans. Because most of the borrowers have a poor credit rating, high interest rates are charged.

Lenders do so to offset the risk involved in lending you money. There are chances that you will make a default. If you fall behind on payments, interest penalties and late payment fees will be added to your account. You may fall into an abyss of debt.

·        A bad impact on your credit

Even if you bounce back immediately after missing a payment, you cannot escape the damage as a result of a missed payment appearing on your credit file. Missed payments continue to appear on your credit file for up to six years, and hard inquiries stay for up to two years.

Your payment history accounts for 35%, and credit inquiries account for 10% of your credit score. Of course, they will lower your credit points. It means you will have to face the consequences of a bad credit rating for the next six years, squashing all your chances of borrowing money at lower interest rates down the line.

Bear in mind that you will need a good credit rating to apply for a mortgage and a car loan. You should take small loans seriously.

·        No payment flexibility

Small loans are paid off in a lump sum on the due date, and the repayment length of these loans is not more than a month. In some cases, your lender would expect you to repay the debt within 14 days. It can be seriously challenging to repay the debt on time. Most of the time, you do not realise that it costs you more than you expected.

Once you fall behind on a payment, you will end up rolling over the loan. This is how these loans work. The debt amount will continue to add up and you will find it even harder to keep up with payments. Unfortunately, lenders do not provide any alternative repayment plans. It is always suggested that you should use these loans only when you are completely confident about your repaying capacity.

·        A possibility of a CCJ

Online loans in Ireland require payment commitment. If you miss three payments, your account will be sent to collection agencies. They will keep chasing you through letters, emails and text messages.

If you do not agree to the payment terms they set, you will end up with a court action. Once a CCJ is issued against you and you fail to clear the whole dues before a month from the court order of settlement, your credit score will plunge into the “very poor” category. The CCJ will stay on your credit file for six years, sabotaging your chances of qualifying for lower interest rates.

The final word

Small loans are typically aimed at funding small emergencies. It is always recommended that you use them for that purpose only because they carry high interest rates and are linked to a risk of falling into debt.

Create an emergency cushion and be consistent. If it falls short of cash, fund the gap with a small online loan. However, if you need money for discretionary expenses such as clothing, you should continue to stash away more money. Small loans should never be used for meeting day-to-day expenses. You cannot be able to get out of debt once you fall into it.