What ticks in your mind when you hear the term short-term loans? Well, a short-term loan is a loan that you can take to cover shorter financial needs. In most cases, people take short-term loans to serve an emergency -and that’s how it should be.
You should never take a short-term loan to cover something that could have waited till you get finances. By so doing, you will be making a financial mistake, and it’s not wise.
For instance, if your car breaks down in the middle of the month, you can take a short-term payday loan to repair it. Another example is when you may have a medical emergency and do not have some savings, you can take a short-term loan.
A short-term loan is an excellent way to get a small business loan or a personal loan. In addition, you can take a short-term loan to boost your finances.
Characteristics of short-term loans
- As the name portrays, they are short-term. Once you take a short-term loan, the lender will require you to repay within one year. And that is a shorter loan than long-term loans that you can pay for more than five years.
- Short-term loans have very high interest rates. In most cases, lenders set very high interest rates when giving out short-term loans. Since the borrowers repay the loan after a short while, the interest rates would be low in standard cases. However, the lenders will not make the designated profits. In addition, the high interest rates cover the risk of defaulting on the loan.
- Short-term loan lenders do not run credit checks when qualifying borrowers. For instance, payday loan lenders do not run credit checks before giving you a loan. Instead, they rely on your ability to repay the loan.
- To get a short-term loan, you need to have a stable source of income. Therefore, the short-term lenders require you to prove that you have a job or a steady source of income.
- They are usually unsecured loans. A short-term loan doesn’t require any form of collateral. So if you fail to pay, they will not take any of your properties.
- Short-term loans are usually small loans, and you cannot solve a long-term financial crisis using a short-term loan.
Examples of short-term loans
We have various loans that we can consider short-term loans since they have the characteristics mentioned earlier.
1. Payday loans
I will define a payday loan as a short-term loan that borrowers repay during the next payday. They usually mature at 14 days. Payday loans Australia no credit check that you must have a steady job before you can apply for a payday loan. Otherwise, you may get yourself in an eternal debt trap. Payday loans have Annual Percentage Rates(APRs) starting from 390%.
2. Online installment loans
These are other examples of short-term loans. Over the years, online lenders have increased in several folds. And that is a result of the ever-growing technology.
The online installment loans are short-term because they mature at most 18 months. In addition, these loans have high interest rates ranging from 5.99% to 39.99%.
3. Invoice financing
This type of short-term loan applies to the businesses that need a loan. But, first, the borrower provides pending invoices to the lender to act as security.
Afterward, the lender gives them a loan in exchange for the invoices. Once debtors pay the invoice, the money goes directly to the lender in favor of the borrower.
4. Lines of credit
The line of credit is another loan that lasts for a short period. The borrower usually has a set credit limit on a credit card. However, the lender charges interest for the borrowed amount but not the whole credit limit.
Advantages of short-term loans
- You can easily acquire the loans —even with a bad credit score
- It’s possible to get the loan within a short period.
- A small amount of loan that you can repay without much struggle
Disadvantages of short-term loans
- The usual one is— very high interest rates
- Short repayment period
- The loans do not build your credit score even if you pay on time
- You can’t solve long term financial needs
- You can only repay the loan in one lump sum amount—interest plus the principal amount
Final words
Generally, short-term loans are costly. Therefore, you should consider other alternatives before you can settle on these short-term loans. If you have to take a short-term loan, ensure that you can repay without much pressure. In addition, remember always to borrow when you need a loan for an emergency.