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Joyce Marter is a licensed psychotherapist with 25 years of experience and entrepreneur who founded and successfully sold Urban Balance, a national outpatient mental health company in the U.S. Marter is an adjunct professor at Northwestern University, international speaker, blogger for Psychology Today and mental health thought-leader specializing in the psychology of money.
Do you find yourself in a financial mire, requiring quick access to funds? If you have not-so-great credit or you don’t want to commit long-term, then it’s not traditional loans you’re looking for. That’s where you need short-term loans.
Short term loans can get you the extra funds you need so quickly. In addition, there are varieties of options to suit various situations, whether you have no credit, bad credit, or exceptional credit.
Here’s a full guide to help you decide whether or not you should get a short-term loan:
Short-term loans are loans that have shorter repayment timelines than traditional loans, usually 12months or less. These loans are meant to cover sudden expenses like a shattered rear mirror, a broken sink, or an expensive dental appointment.
Short term loans generally provide less funds than traditional loans, but it can vary depending on the type and the lender. Again, short-term loans can have higher fees and interest rates.
Short-term personal loans can be applied for online or physically at a loan company, bank, or credit union. The loan type that suits you will depend on several factors like the amount you need, how long it will take you to repay the balance, your assets, and your credit. We shall clarify the various types of short-term loans below.
After your application, the lender will decide whether to approve your loan. If they do, you’ll need to review the terms and rates to ensure they work for you. If you accept them, you will get your loan within that same day and a few business days. Then after that, you’ll start repaying according to your contract till the debt is fully repaid.
Let’s consider the various types of short-term loans you can get to take care of your personal expenses.
Payday loans are small-dollar loans usually $500 or less and due within two to four weeks to be repaid on our next payday. These loans can be gotten even with bad credit since most brick-and-mortar lenders don’t run credit checks, rather they may use your recent paystub as a basis for approval.
Online payday lenders offer some degree of flexibility but they often run credit checks. The drawback is that payday loans often have high APR up to 400%, so they are only advisable if you can’t access any other financing options.
Collateral loans otherwise called secured loans are backed up by an asset such as a car title or some other personal property. Collateral loans are usually provided by auto title lenders and pawn shops.
Pawn shops allow you to provide something of value in exchange for a loan. So, they keep your item if you don’t repay your loan. Auto title loans can lend you a percentage of your vehicle’s worth if you own the car in full. However, you could forfeit your car if you fail to re[ay the loan plus fees and interest on the due date.
It is easier to qualify for collateral loans, plus they carry lower rates than unsecured loans. But your lender can take the collateralized assets if you default, so ensure you can repay on time before taking this path.
Unsecured personal lines of credit work like credit cards. Once you’re approved for a particular loan amount, you can draw as needed provided you don’t exceed the limit.There’s no interest on any money you don’t use, making lines of credit perfect for you if you aren’t sure of how much to borrow. However, approval for lines of credit requires decent credit.
Emergency cash loans are helpful for covering unexpected bills like hospital emergencies, car repairs, etc.They are unsecured loans with fast funding timelines to provide you with quick funds.
Once approved, you’re sent the loan amount as a lump sum. They have fixed interest rates and terms usually range from several months to a year and above.
The drawback is that you will require decent credit to get accepted. Again, you should have good to exceptional credit to be given attractive terms and rates.
The Federal Reserve has it that the average interest rate for a 24-month personal loan is around 8.73%, whereas auto title loans have an average APR of 300%, while payday loans have a 400% APR on average. Short-term loan APRs can drop anywhere in between these values. If the lender you apply with checks your credit, your history and score will factor in the interest you receive. Better scores usually translate to lower fees and rates.
Let’s look closer at how interest rates can affect you based on your borrowing situation.
When you shop online for a 12-month $1,000 personal loan for debt consolidation, let’s say with a fair credit score in the 640 to 699 range the APR will range between 6.49% and 34.99%.
By consolidating your debt with a short-term loan, you can get a lower interest rate and save some money, especially if you’re in credit card debt. Credit cards have an average APR of 14.52%.
It’s better to combine your bills into one single monthly bill instead of separate payments so you can rationalize your payments and not miss them.
When you shop online for a 12-month $1,000 personal loan for home improvement, let’s say with a fair credit score in the 640 to 699 range, the APRs will also range between 6.49% and 34.99%.
A short term personal loan can be a great choice if you need money for an urgent home improvement project. You’ll get the money you need quickly and not have to collateralize your home.
However, because short-term loans are generally unsecured—they could carry higher interest rates than secured financing options such as home equity lines of credit—which is something to be mindful about.
No doubt short-term loans can help you bridge the gaps in money flow, buy inventory, and grow your business. There are usually identical interest rates for business and personal loans, but it may be easier to qualify for personal loans if your company doesn’t have a long credit history.
With short-term loans, you can pay for certifications that will boost your career. Though personal loans usually carry higher rates than student loans, they are more flexible in the courses they allow you to take, which makes them a somewhat better choice for career advancement.
The following are some major benefits of short-term loans to help you determine whether they fit your situation.
Majority of lenders offer online applications that take just a few minutes to finish, and your approval can come as fast as the next business day.
Since there’s little time for the interest to accumulate, your overall borrowing costs should be lower for short-term loans than long-term loans.
When you repay your loan on time, you may improve your credit score, proving to future lenders that you’re responsible with debt management. You can ask your lender whether they report to the credit bureaus.
People can use personal loans for a variety of purposes, from moving costs to car repairs. The terms are usually flexible too, letting you choose a payment plan that fits you most.
On the flipside, short-term loans can carry higher rates than long-term loans, which is worth bearing in mind. These loans may also have origination fees and late payment fees, so do well to include them while planning the cost for a short-term loan you want to take out.
It’s possible not to have enough funds to repay your loan, which puts you at risk of defaulting or getting stuck in a debt cycle. It’s common practice if you can’t repay your loan, to be given an extension with extra fees. This path can be tricky. But if used rationally, short-term loans provide a good way to settle personal or business expenses that your savings can’t take care of.
When you apply for a loan, it causes a small and temporary decline in your credit score if your lender runs a hard check on your credit report. Meanwhile, your payment history is the biggest determining factor (35%) of your credit score, meaning that if you repay your loan on time, your lender will report your account to the major credit bureaus, and your credit score will most likely get a raise. If you have no installment accounts, taking a short-term loan can also boost your credit mix, which constitutes 10% of your FICO score.
Conversely, if you miss payments, your credit could get hit negatively. If your payment falls 30 days behind the due date, your lender may report to the credit bureaus, which may cause you to lose some dozens worth of credit score points. So, the best thing to do when you can’t make a scheduled payment is to reach out to your lender immediately.
Majority of banks and credit unions provide short-term loans. But online lenders are a viable option if you look to get your funds quickly. They often provide quicker application processes and funding timelines than traditional banks. Again, it’s very easy to compare between online lenders and get the best deal for you.
The most suitable short-term loan will be dependent on your personal financial situation but it’s interesting to know that there’s a solution for virtually everyone. Whether it’s payday loans, auto title loans, credit lines, or emergency loans, you are certain to get the funds you need quickly to cater to your expenses and get on with your life.