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Short-Term Loans: What They Are And Where To Find The Best Options

Jerry Brown7-Minute Read
March 26, 2022

Sometimes unexpected things happen. Unplanned car repairs, pandemics and medical emergencies can wreak havoc on our personal or business finances. If we don’t have an emergency fund or the expense is just too large, short-term loans are one option we can use to bridge the gap.

What Is A Short-Term Loan?

A short-term loan is one that has a short repayment period, usually within 12 months or less. These loans are not limited to a certain type – it can be a line of credit or short-term installment loan. With a line of credit, you borrow money on an as-needed basis; an installment loan requires fixed monthly payments.

Also, short-term loans can be used for several purposes, but they are usually taken out to cover an emergency expense. Need cash to cover an unexpected root canal or minor business cash flow problems? A short-term loan might be a possible solution.

How Short-Term Loans Work

Taking out a short-term loan usually involves applying for a loan with a lender or using an existing line of credit. The lender will require you to repay the loan according to terms you agreed to.

Amount

The amount you can borrow with a short-term loan varies by loan product and the state you live in. For example, some personal loan lenders have different minimum loan amounts based on where you live. Some personal loan lenders may allow you to borrow as little as $100, while other lenders may have a higher minimum loan amount.

When searching for a short-term loan, keep in mind that the higher the loan amount, the higher the minimum payment will be. The amount you get approved for will depend on your income and how much debt you currently have.

Duration

Short-term loans can last from as short as one week to as long as 12 months. However, depending on the loan product you use, a short-term loan could be longer. For example, a 0% interest APR credit card might have an interest-free promotion period that lasts up to 18 months.

Also, a short-term loan can become a long-term loan if you use a credit card and only pay the minimum monthly payments.

Interest

If you take out a short-term loan with a lender, you’ll most likely be charged interest fees, unless you qualify for an interest-free promotion. To earn more money, lenders typically charge higher interest rates on shorter-term loans. This is especially true of payday loan lenders.

Down Payment

Unlike mortgage loans, when you take out a short-term loan, lenders don’t typically expect down payments. However, if you take out a secured short-term loan – a loan that requires an asset to secure the loan – you might have to use a cash account as collateral.

Credit

To get approved for the best short-term loans, lenders usually require that you have a good credit score. According to the FICO® scoring model, a good score is 670 or higher.

But if you have a score less than that, don’t worry. Some lenders have loan products designed for borrowers who have lower credit scores. To compensate for the risk, however, a lender may charge you a higher interest rate or fees.

Before you apply, do some research on the lender’s eligibility requirements. That way, you’ll improve your chances of being approved.

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Why Get A Short-Term Loan?

If you’re looking to get a short-term loan, here are some of the benefits.

  • Speedy application process: Some lenders have online applications that take less than 10 minutes to complete.
  • Quick funding: Depending on which lender you apply with, funds can be directly deposited into your account as soon as the next business day.
  • Can be approved with bad credit: Although lenders may charge you higher interest rates or fees, you can still get approved for a short-term bad credit loan.
  • May improve your credit score: If you repay your loan on time, this might improve your credit score.
  • May help you save money: Using a short-term loan to cover an emergency expense might help you save money. For example, if you let an important car repair go unfixed it can turn into a more expensive problem.

Individuals

Short-term loans can be useful if you need to cover emergency expenses. You can use a short-term loan to cover medical expenses, moving expenses, emergency home repairs and more.

For example, imagine you get a job offer in another city and don’t have money in the bank to cover relocation expenses. In that scenario, using a short-term loan could help you pay for a moving van, security deposit or other moving-related expenses.

Businesses

A business might need a short-term loan to cover unexpected expenses or payroll. For example, as a result of the COVID-19 pandemic, a lot of businesses had to close down. To help them survive, the U.S. government created loan programs.

Another benefit to using a short-term loan for business purpose is that you can use it to grow your business. If you have dreams of expanding, getting a small-business loan to buy extra inventory can help your business grow in the long run.

Types Of Short-Term Loans

There are several types of short-term loans; all of them aren’t created equal. Some short-term loans come with super high interest rates or fees and should be avoided, if possible.

Cash Advance

A cash advance is a short-term loan that allows you to borrow cash using your credit card. It’s an easy process that involves visiting an ATM and entering a pin number. This can be useful if you need cash immediately.

Before you rush out to the nearest ATM to grab some cash, keep in mind this option is expensive. You’ll be on the hook for paying transaction fees and possibly a higher interest rate than your card’s normal purchase rate.

Installment

An installment loan is issued to you in a lump sum by the lender. When you repay the loan, you send the lender fixed monthly installment payments. Unlike a credit card, the loan has a clear end date.

If you use this type of loan, make sure that you can afford the monthly payments. Missing a payment or defaulting on the loan can cause serious damage to your credit score.

Credit Line

A credit line is a line of credit you can borrow against. For example, you may have a credit card in your wallet with a limit of $10,000. When you use this type of loan, you borrow money on an as-needed basis and have no set repayment schedule.

In addition, you can also use a home equity line of credit (HELOC) to borrow money. With this option, though, you can lose your home if you default on the loan.

If you decide to use this form of debt, make sure you understand what the interest rate is and how much debt you can afford to take on.

Payday Loan

Payday loans are loans designed to be paid back by your next payday. These loans can have annual percentage rates (APR) as high as 400%. APR measures how expensive a loan is by taking into account its interest rate, along with any fees.

Because of its high interest rate and fees, it’s a good idea to steer clear of these loans. Only use them as a last resort.

Payday Alternative Loan

A payday alternative loan is an option offered by some federal credit unions. These loans come with more favorable loan terms.

Borrowers can get up to $2,000 and the loan term typically range from 1 –12 months.

The coolest part is that the maximum interest rate on these loans is 28%. However, to apply for this loan you must be a member of the federal credit union or be eligible for membership.

If you have less-than-perfect credit, this may be a better option than applying for a payday loan.

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Where To Find Short-Term Loans

To find short-term loans, you can compare lenders by taking a look at an online loan comparison site. In addition, you can contact your local credit unions or banks.OnlineWhen searching for lenders online, be sure to review their credentials. Read the fine print, which includes the loan's possible terms and conditions. If you have any doubts about the lender’s reputation, consider looking it up on the Better Business Bureau website.Credit UnionsTo take out a short-term loan with a credit union, you must be a member or be eligible for membership. Before you apply for membership, check with the credit union to see if short-term loans are available.Since credit unions are not-for-profit, member-owned institutions, you might be able to score a better interest rate.BanksCompared with credit unions, banks are for-profit institutions. Because of this, banks may charge higher interest rates and fees than you’d get with a credit union. If you decide to go this route, it could be a good idea to compare the short-term loan rates at multiple banks.

Tips For Taking Out A Short-Term Loan

If you need to take out a short-term loan, you should try avoiding payday loans, carefully consider interest rates and look for hidden fees.

Watch Out For Payday Loans

If you don’t want to pay a sky-high interest rate or fees, avoid payday loans if at all possible. Before getting one, search for alternatives, like the options mentioned above. In addition to payday loan alternatives, search for community grants in your area or ask a family member for help.

Carefully Consider Interest Rates

Before you take out a short-term loan, take a look at its interest rate. The interest rate is a key factor in figuring out how much the loan will truly cost.

Look For Hidden Fees

Along with a loan’s interest rate, you should look for its hidden fees, which may include charges for late payment, application, prepayment and origination.

All of these fees increase the cost of using a short-term loan.

The Bottom Line: Find The Right Short-Term Loan

Although using a small personal loan to cover emergency expenses can be a good idea, do your research first. Some lenders may charge hidden fees and high interest rates for this type of loan. These fees can make your financial situation worse.

If money is really tight, consider reaching out to your local area of commerce for grants to avoid paying interest and fees. Also, if you have any current debt, reach out to the lender to see if it can be placed in forbearance. This may free up cash to repay the short-term loan or help cover your emergency.

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    Jerry Brown

    Jerry Brown is a personal finance writer based in Baton Rouge, La. He's been writing about personal finance for three years. Financial products he enjoys covering include credit cards, personal loans, and mortgages. Jerry was nominated for a Plutus award for best social media for personal finance in 2020.