What Is a Short-Term Loan?

A short-term loan is a type that offers its borrowers funds and flexibility to use it for a variety of purposes, such as covering unexpected expenses or consolidating the previous debt you’ve collected. This short-time loan typically has higher interest rates than longer-term ones but can be a good option if you need access to cash quickly. Here we will discuss not only the positive and negative sides of these loans, but also provide you with a good guide on how they work and what are some types available.  

A short-term loan is a type of loan that is typically repaid within a year. These loans are often used to cover some expenses until their next paycheck arrives. They come in both secured and unsecured types, so you can choose which fits you better.  

Loans for the short term can be a helpful way to get the needed money quickly. However, don’t forget that this “quick cash “can also be really expensive in a long run.  

How Does a Short-Term Loan Work?

Many people opt for these loans in order to cover unexpected expenses or to bridge the gap between paychecks. They can be obtained from banks, credit unions, and online lenders.  

The whole application process is not that difficult, and once you take out a short-term loan, you will typically be required to sign a promissory note. This document is there to outline the terms of your loan agreement, including the repayment schedule and any fees or interest that will need to be paid. Don’t overlook this step and be sure you first understand the promissory note before agreeing to anything. Once everything is signed, the lender will provide you with the funds you have requested.   

After the whole process is done, you will be responsible for repaying the loan, plus any interest and fees that are associated with your loan deal.   

If you decide to borrow money short-term, know they are usually repaid in installments, but some lenders may allow you to make a lump-sum payment if you previously discussed this.  

In case you are unable to repay it all, you may be charged additional fees and penalties or even lose some of your belongings.  

Depending if you chose a secured or unsecured type, you may be required to put down collateral. Secured loans will need you to put down your house, car, or some other asset in order to qualify but as a result of this will give you a lower interest rate.  

Common Types of Short-Term Loans

There are a few different types of short-term loans available for borrowers depending on their needs. Here are some of the most common ones:  

Payday Loans  

This is a type of short-term lending that typically comes with high-interest rates. Payday loans offer a small amount of money and are often used by people who are in a tight financial spot and need quick access to cash. While they can be helpful in some situations, they can also be very costly and cause many financial problems for borrowers if not managed correctly.  

Merchant Cash Advances  

A merchant cash advance (MCA) is a short-term loan that provides businesses with the capital they need to grow and expand. MCAs are mostly used for working capital, inventory, or equipment purchases. The repaying is based on a percentage of your daily credit card sales. This repayment structure is especially beneficial for businesses that have seasonal or fluctuating sales because you only pay back the loan when you have the funds to do so.  

Line of Credit  

A line of credit is a popular temporary loan type that allows you to borrow money up to a certain limit. You can use the money for any purpose and you only have to pay interest on the amount that you actually took out. They are a good alternative to a traditional loan and typically offer lower interest rates. In order to be eligible to apply for them, you must have a good credit score.  

Bank Overdraft  

An overdraft happens when you do not have enough money in your account to cover a transaction you initiated, but the bank pays the amount anyway. This can happen if you write a check for more money than you have in your account or make an ATM withdrawal without sufficient funds.  

They can be costly because the bank charges a fee for each one of them. Additionally, if you continue to overdraft your account, the bank may close it.  

Short-Term Loans: Pros and Cons

Short-term loans can give you the financial boost you need to handle an ongoing financial crisis, but they also come with some risks. Here we will present you with the most common pros and cons to think about before you decide whether is this a good option for you or not.   

Pros:  

• You can get the money you need quickly.  
• Short-term loans can be easier to qualify for than traditional loans.  
• You may be able to negotiate a lower interest rate on a short-term loan.  
• You can apply for a short-term loan fairly easily.  
• Funds secured this way can be used for a variety of purposes.  

Cons:  

• Short-term loans often have higher interest rates than traditional loans, so you’ll end up paying more in the long run if you do not shop around for a better deal.  
• If you miss a payment, it could damage your credit score.  
• You may be tempted to use the money for things other than what you originally intended, which can put you in a difficult financial situation down the road.

Are Short-Term Loans a Good Idea?

Now that we explained what a short-term loan is and the types available, let’s answer the question, is it a good idea to take this loan?  

These short loans can be helpful in some situations but do come with some risks. Nonetheless, many people still choose them when in need of money to cover an emergency expense or purchase a certain asset. They also come in handy if you’re trying to consolidate debt or pay off high-interest credit card bills. With that being said, be sure to also think about how you could end up paying much more in interest than you would if you were to choose a traditional loan.   

Like any other loan type, if used wisely, any short-term loan can be a good option to overcome a difficult situation.  

Alternatives to Short-Term Loans

There are a few alternatives to short-term credit loans that you can research and learn about before you actually decide which one is the right fit for your situation.   

A personal loan obtained from a friend or family member can be a great alternative as it can offer even more flexibility if you just take your time and talk to a member who is going to lend you money, about the repayment and interest they would require.  

If this is not an option for you, but you do have good credit, you may be able to get a cash advance on your credit card. There are also a number of online lenders that offer many short-term loan types, so you can surely find the one that suits you best.  This all depends on what you need money for, but you should not give up on short-term loans that easily as there are many types and there is something for everybody.  

Whatever option you choose, make sure you understand the terms and conditions before agreeing and signing anything.  

Final Thoughts

Now that you have a good understanding of these loans and know how they work, the next question is are they right for you? There is no one-size-fits-all when it comes to loans and just because this was a good choice for your friend or someone you know it doesn’t mean it will be for you as well. Hire a financial advisor and let them guide you through this process and help you find the right fit.  

If you end up deciding to take out a short-term loan, be sure to shop around and compare rates and terms from different lenders to ensure that you are getting the best deal possible. Also, never forget to read the fine print before signing any loan agreement!