Short term loans are very popular with certain types of borrowers who need to free up money quickly.
They can suit the demands of some. Nevertheless it’s important to understand both the upsides and downsides to short term loans. In this article we’ll explore them in more detail.
What are Short Term Loans?
Short term loans are a type of credit facility that allows borrowers to access funds quickly and repay them within a relatively short period. These loans are typically used to cover unexpected expenses or cash flow issues, offering a temporary financial solution for those who need it.
The primary appeal of short term loans is that they can be acquired fast. Thus providing borrowers with the much-needed funds in a matter of hours or days. This swift turnaround time makes them a popular choice for individuals and businesses that require urgent financial assistance.
Although short term loans offer quick access to funds, they often come with higher interest rates than long-term loans. This is because lenders assume a greater risk when providing loans with shorter repayment terms.
Despite the higher interest rates, short term loans can be a viable option for borrowers who need cash quickly and are confident in their ability to repay the loan within the agreed-upon timeframe.
One crucial aspect of short term loans is understanding the various types available, their unique features, and how to choose the best option for your financial needs.
Types of Short Term Loans
There are several types of short term loans available in the market, each designed to cater to specific financial needs. Some of the most common forms include:
Payday Loans
These are unsecured loans that require borrowers to repay the entire loan amount, including interest and fees, on their next payday. They are designed for individuals who need quick access to funds to cover unexpected expenses.
Installment Loans
Also known as personal loans, instalment loans allow borrowers to repay the loan amount in fixed monthly instalments over a predetermined period. These loans can be either secured (backed by collateral) or unsecured, and they generally offer more flexible repayment terms than payday loans.
Lines of Credit
A line of credit is a flexible borrowing option that allows borrowers to draw funds up to a pre-approved credit limit and repay the amount used with interest. Borrowers can access the funds multiple times without reapplying for a new loan, making it a convenient option for ongoing expenses.
Invoice Financing
This type of short term loan is specifically designed for businesses. Invoice financing allows companies to borrow money against their outstanding invoices, providing them with immediate cash flow to cover operational expenses.
Merchant Cash Advances
A merchant cash advance is a type of financing for businesses that need quick access to funds. Lenders provide a lump sum payment in exchange for a percentage of future credit card sales, which is then used to repay the advance.
Why Choose Short Term Loans?
There are several reasons why individuals and businesses may opt for short term loans over traditional long-term financing options. Some of the main factors driving this preference include:
- Speed: Short term loans can be processed and approved much faster than long-term loans, with some lenders like Boodle and Unifi providing funds within 24 hours. This makes them an ideal choice for those in need of urgent financial assistance.
- Flexibility: Short term loans offer a range of borrowing options, allowing borrowers to choose the most suitable loan type for their specific needs. This flexibility extends to repayment terms, with some short term loans offering customisable repayment schedules.
- Easier approval: Borrowers with less-than-perfect credit scores may find it easier to get approved for short term loans than long-term loans, as the lender’s risk exposure is lower. This can be particularly beneficial for those who have faced financial difficulties in the past but require a short-term cash injection.
- Fewer long-term obligations: Short term loans provide borrowers with the opportunity to address immediate financial needs without committing to a lengthy repayment term. This can be an attractive option for those who want to minimize their long-term debt obligations.
Eligibility Criteria
The eligibility criteria for short term loans may vary between lenders, but there are some common requirements that borrowers should be aware of. These include:
- Age: Borrowers must be at least 18 years old to apply for a short term loan.
- Income: Lenders typically require proof of steady income to ensure that borrowers can afford the loan repayments. This may include pay stubs, bank statements, or tax returns.
- Employment: Some lenders may require borrowers to be employed or have a regular source of income to be eligible for a short term loan.
- Credit history: While short term loans may be more accessible to borrowers with poor credit, lenders still consider credit scores when assessing loan applications. A higher credit score may result in more favorable loan terms, such as lower interest rates and fees.
- Residency: Borrowers must be residents of the country in which they are applying for the loan. Some lenders may also require borrowers to have a permanent address.
The Application Process for Short Term Loans
The application process for short term loans is relatively straightforward and can be completed in a few simple steps:
Research and Compare Lenders
Before applying for a short term loan, borrowers should research various lenders to find the one that offers the most suitable loan terms and conditions. This may include comparing interest rates, fees, and repayment terms.
Submit an Application
Once a suitable lender has been identified, borrowers can submit a loan application either online or in-person. The application will typically require personal information such as name, address, contact details, and employment details, as well as financial information such as income and expenses.
Provide Documentation
Lenders may require borrowers to provide supporting documentation as part of the application process. This may include proof of income, bank statements, and identification.
Loan Approval and Disbursement
If approved, the lender will provide the borrower with a loan agreement outlining the terms and conditions of the loan. The borrower should carefully review this agreement before signing.
Once the agreement is signed, the lender will disburse the loan funds.Ttypically via a direct deposit into the borrower’s bank account.
Interest rates and Fees
Short term loans generally come with higher interest rates and fees than long-term loans. This is due to the increased risk assumed by the lender. Some of the common costs associated with short term loans include:
Interest Rates
The interest rate on a short term loan is typically higher than that of a long-term loan, reflecting the increased risk associated with shorter repayment terms. Interest rates can vary significantly between lenders, so borrowers should compare loan offers to ensure they are getting the best deal.
Origination Fees
Some lenders charge an origination fee to cover the costs associated with processing the loan application. This fee is usually a percentage of the total loan amount and is typically deducted from the loan proceeds.
Late Payment Fees
If a borrower fails to make a loan repayment on time, they may be charged a late payment fee. This fee is usually a fixed amount and may be added to the outstanding loan balance.
Prepayment Penalties
Some lenders may charge a prepayment penalty if a borrower chooses to repay their loan early. This is designed to compensate the lender for the loss of interest income that would have been earned if the loan had been repaid according to the original schedule.
Tips for Responsible Borrowing
To maximise the benefits of short term loans and minimise the risks associated with this type of borrowing, borrowers should keep the following tips in mind:
- Borrow only what you need: It’s crucial to borrow only the amount necessary to cover your immediate financial needs. Borrowing more than required can lead to increased debt and difficulty repaying the loan.
- Be realistic about your repayment ability: Before applying for a short term loan, carefully assess your ability to repay the loan within the agreed-upon timeframe. Ensure that you have a clear understanding of the loan terms and conditions, including the repayment schedule and interest rates.
- Shop around for the best deal: As with any financial product, it’s essential to compare different lenders and loan offers to find the most suitable option for your needs. This may involve comparing interest rates, fees, and repayment terms.
- Plan for repayment: To ensure timely loan repayment, create a budget that factors in the loan repayment schedule and any associated fees. This can help to prevent late payments and the associated penalties.
- Communicate with your lender: If you encounter any financial difficulties during the loan repayment period, it’s essential to communicate with your lender as soon as possible. Many lenders are willing to work with borrowers to find a solution. Such as restructuring the loan or adjusting the repayment schedule.
Maximising the Benefits of Short Term Loans
To get the most out of a short term loan, borrowers can adopt the following strategies:
Use the Loan for its Intended Purpose
Borrowers should use the loan funds to address the specific financial issue for which the loan was taken out. This can help to prevent the misuse of funds and ensure that the loan serves its purpose.
Repay the Loan Early if Possible
Repaying a short term loan early can help borrowers save on interest costs and reduce their overall debt. Some lenders may offer prepayment incentives, such as reduced interest rates or waived fees.
Avoid Taking on Multiple Loans
Borrowing multiple short term loans simultaneously can lead to a debt cycle that can be challenging to break. Borrowers should be cautious about taking on additional debt and should focus on repaying their existing loan before considering another.
Build an Emergency Fund
To reduce the need for short term loans in the future, borrowers should consider building an emergency fund. This can provide a financial cushion in the event of unexpected expenses, reducing the reliance on short term loans.
Pros and cons of short term loans
As with any financial product, there are both advantages and disadvantages associated with short term loans. Some of the key pros and cons to consider include:
Pros:
- Quick access to funds: Short term loans can provide borrowers with fast access to cash. This makes them an ideal solution for emergency expenses or cash flow issues.
- Easier approval: Borrowers with less-than-perfect credit may find it easier to get approved for short term loans than long-term loans. This is because the lender’s risk exposure is lower.
- Flexible repayment terms: Some short term loans offer customizable repayment schedules, allowing borrowers to tailor the loan to their specific needs.
Cons:
- Higher interest rates: Short term loans generally come with higher interest rates than long-term loans, which can increase the overall cost of borrowing.
- Potential for debt cycle: The ease of access to short term loans can lead some borrowers to rely on them too heavily. This results in a cycle of debt that can be difficult to break.
- Impact on credit score: Failing to repay a short term loan on time can have a negative impact on a borrower’s credit score, making it more challenging to secure credit in the future.
In Summary
Short term loans can be a valuable financial tool for borrowers who need quick access to funds and are confident in their ability to repay the loan within a short timeframe.
By understanding the different types of short term loans available, the associated interest rates and fees, and the strategies for responsible borrowing, borrowers can maximize the benefits of these loans while minimizing the potential risks.
It’s essential to carefully consider your financial needs and circumstances before applying for a short term loan, ensuring that this form of borrowing is the most suitable option for your unique situation.
