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Short-Term Loans: A Complete Finance Guide

Dan Rafter7-Minute Read
July 14, 2022

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

What Is A Short-Term Loan?

Short-term loans are a type of financing that don’t require collateral and have to be paid off within 12 months or less. Some may even have terms as short as a few weeks.

These loans are not limited to a certain type. They can be a line of credit or short-term installment loan. With a line of credit, you borrow money on an as-needed basis, whereas 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. If you need cash to cover an unexpected root canal or minor business cash flow problems, a short-term loan might be a possible solution.

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How Do 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. While they share some similarities with other common types of loans, there are some important differences that you'll want to be aware of.

  • Loan 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.
  • Repayment terms: 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.
  • Interest rates: 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 lenders. Your interest rate will be dependent on a few factors, but the main one will be your credit score.
  • Collateral: Most short-term loans are unsecured but some secured options may require collateral. A short-term loan could be secured with something like a vehicle title. Usually secured loans will come with lower interest rate than unsecured loans, but you risk losing your collateral if you don't pay the loan back.

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Types Of Short-Term Financing

There are several different forms of short-term loans to consider using. Using the additional information below, you can find out more about the different types of short-term loans to determine which one would work best for your situation:

Installment Loans

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 and your monthly payment will be the same each month.

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.

Cash Advances

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 your PIN. This can be useful if you need cash immediately.

But 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. You'll also usually be charged interest from the date of your withdrawal, even if you pay your statement balance in full.

Payday Loans

A payday loan is a type of short-term loan that is 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 considering its interest rate, along with any fees.

Payday loans are notorious for their predatory repayment terms, including high interest rates and fees, so it’s a good idea to steer clear of these loans and only use them as a last resort.

Car Title Loans

A car title loan is a type of secured loan that uses the borrower’s vehicle as collateral. If you own a vehicle, you can use it as collateral to get a short-term loan. Most lenders only allow 25 – 50% of the car’s value for the loan amount. Many car title loans can also have predatory terms, so you'll want to be careful before signing up for one. If you don't fulfill the terms of the loan, the lender may repossess your car.

Bridge Loans

Bridge loans are often used when you are moving and can help cover transition and last-minute expenses during the moving process. A bridge loan might be used as a way to buy a new home before you've sold your existing home.

You may be able to use the proceeds of a bridge loan to cover closing costs or a down payment on your new home, and then pay it off once you sell your existing home.

Lines Of Credit

Another option that might make sense is to use the line of credit on your credit card as a type of short-term loan. For example, you may have a credit card in your wallet with a credit 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, you again only pay interest on the actual amount that you need. Keep in mind, though, you can lose your home if you default on the loan.

Alternatives To Short-Terms Loans For Bad Credit

Besides a payday loan, there are alternative ways you might be able to cover emergency expenses:

  • Financial assistance from friends or family — you may be able to explain your situation to trusted friends or family and get some help.
  • Crowdfunding — depending on the circumstances of why you need a short-term loan, you might be able to use a crowdfunding platform.
  • Churches or charitable organizations — if you belong to a church, they may have funds available to help parishioners suffering short-term financial trouble. Local charitable community organizations also may be able to help.
  • Payday loan alternative from a federal credit union — with a payday alternative loan from a federal credit union, borrowers can get up to $2,000 at a maximum of 28% interest with a loan term from 1 –12 months.

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Alternatives To Short-Terms Loans For Bad Credit

Besides a payday loan, there are alternative ways you might be able to cover emergency expenses:

  • Financial assistance from friends or family — you may be able to explain your situation to trusted friends or family and get some help.
  • Crowdfunding — depending on the circumstances of why you need a short-term loan, you might be able to use a crowdfunding platform.
  • Churches or charitable organizations — if you belong to a church, they may have funds available to help parishioners suffering short-term financial trouble. Local charitable community organizations also may be able to help.

Payday loan alternative from a federal credit union — with a payday alternative loan from a federal credit union, borrowers can get up to $2,000 at a maximum of 28% interest with a loan term from 1 –12 months.

How To Get A Short-Term Loan

You should research all your options before applying for a short-term loan. Once you're ready to get a short-term loan, here are the steps to follow:

1. Find A Lender

First, you'll want to find a lender to use. There are a variety of different types of lenders to consider:

  • Neobanks (also called online lenders)
  • Traditional banks
  • Credit unions
  • Payday loan lenders

You'll want to research each of the above types and read several customer reviews before choosing a lender to use.

2. Compare Rates And Terms

It’s common for lenders to offer several different types of short-term loan products. Before applying, it's a good idea to compare the interest rates and repayment terms for each type of loan across several different lenders.

It's also important to check the fine print of a short-term loan before signing any paperwork. Make sure to understand how and when your loan needs to be repaid.

3. Submit An Application

After deciding on a lender and a particular short-term loan type, you will need to apply for a personal loan. The exact documents you'll need to provide vary by lender. It's likely that you'll have to provide bank statements, driver’s license or ID, pay stubs and possibly tax forms.

4. Receive A Lump Sum

In most cases, once you're approved, the lender will most likely directly deposit the funds into your bank account. Usually this happens on the same business day that your application is approved.

The Bottom Line

Although using a small personal loan to cover emergency expenses can be a good idea, do your research first. While there are legitimate short-term lenders, many short-term lenders may charge predatory fees and high interest rates for this type of loan. These fees can make it difficult to extract yourself from a cycle of needing a new short-term loan to pay off your last short-term loan.

Getting A Personal Loan Has Never Been Easier.

The Rocket LoansSM application process makes borrowing simple.

Dan Rafter

Dan Rafter has been writing about personal finance for more than 15 years. He's written for publications ranging from the Chicago Tribune and Washington Post to Wise Bread, RocketMortgage.com and RocketHQ.com.