Pamela Peredo

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Short term loans move more quickly than traditional multi-year loans. The application process tends to be fast as the borrower has a specific, often unforeseen, reason for needing a quick and short loan. 

As with any loan, the borrower’s credit score and credit history will determine the exact terms of the loan. The time could range from a matter of weeks to months, but not years as the time is what differentiates short term loans from other types of loans.

As long as you have a steady source of income, you are likely to be approved for short term loans with your credit score determining what the interest rate will be. The loan will be unsecured unless your credit is very poor, in which case you may have more limited options.

What You May Need a Quick Loan For

Borrowers are often emotionally prepared to get long term loans, particularly when it comes to purchasing a home or car. Those tend to be costs that are thought through ahead of time and are often dream purchases for many.

Short term loans may become necessary for borrowers facing unexpected circumstances. You may face a medical cost or a home maintenance repair that you were not financially prepared for. With so many people in the U.S. living from paycheck to paycheck to cover consistent costs, many do not have enough savings to cover other bills.

Another potential reason you may need to seek out short term loans is consolidating debt to lower some monthly payments. Often, a long term loan is the most appropriate for transferring debts, but it may be too difficult to secure that type of loan, particularly with less-than-stellar credit or shorter work history. A quick loan could be easier to get and help with your monthly obligations.

Short term loans can also be an option if you have recently lost work. You may have the ability through unemployment or a severance package to make the payments that accompany a short term loan, while also being able to have money on hand while you seek work again. Emergency loans are another commonly used term for these kinds of loans.

Types of Short Term Loans

short term loans

There are multiple options when considering procuring short term loans. One piece of advice you may receive is to get a payday loan, which is one of the easiest types of loans to get approved for. With a payday loan, you receive the money immediately with a very short turn-around repayment time, essentially your next payday. The repayment includes the original sum plus a generally high-interest amount.

You can also seek short term loans through a bank or financial institution. One form is through a line of credit, which may either be a standard part of your relationship with your bank/credit union or can be applied for. There is a maximum amount sent by the lender, which is based upon credit score and payment history. You can borrow some or all of the money available.

There are also more straightforward short term loans from banks, which have a fixed end date, unlike a line of credit or bank overdraft. While borrowers may feel most comfortable applying for lengthy loans in person, short term loans can easily be done online from the application process to the approval and transfer of loaned money.

Disadvantages of Short Term Loans

There are things to be aware of before deciding on taking out a short term personal loan. Payday loans are particularly risky because of the very high-interest rates and quick repayment schedule. If you are unable to make the full payment when it is due, a payday loan can become a cycle of debt that is hard to escape.

Regardless of what type of quick loan it is, the interest rate tends to be higher than rates for long term loans. This can make the payments higher than you may have anticipated, creating even greater financial hardship than when you first took out the loan. 

The fact that a borrower needs to take out a short term loan means they did not have enough money on hand to finance whatever they are paying for or to pay their current debts. With the high interest and short payback time, the borrower may find themselves unable to pay back the loan and find themselves in an even more fraught financial predicament.

Due to the nature and timing of short term loans, they are not ideal if you are seeking a large amount of cash or are trying to pay down on a large debt. For those seeking to consolidate credit cards and/or debt, longer-term loans are more likely to be available because of the larger debt.

Advantages of Short Term Loans

Speed and availability are two of the main benefits of short term loans. The entire process of applying to receive the money is quick and allows you to use the funds for whatever you want or need. Unlike major long term commitments like getting loans for your home or car, there is no collateral necessary for a short term loan.

Short term loans are also easier to acquire than loans with a longer term. The requirements are less strenuous and are much easier to secure even with poor credit. Having a steady income can help a borrower get a quick loan, while that is just one of many factors in applying for larger and longer loans.

Another major advantage of quick personal or business loans is the lack of long-term commitment. Whereas a long term loan may take many years to pay off, a short term loan is rarely longer than 18 months or, more often, a year at most. This gives the borrower the chance to pay off the loan in a short time and, as long as they make regular payments, help improve their credit score and credit history.

Lenders can also allow for far more flexibility with loans that are paid over such a short period of time so they may be more willing to work with a borrower’s financial situation. This can include a specially designed payment plan where the borrower may only need to pay off the interest at the beginning of the loan and then pay off the principal. 

This could be particularly beneficial if the borrower is able to free or lower some debts early on in the loan and is then more able to pay off the rest of the principal later in the loan period.

How Loans Affect Your Credit Score

Other than payday loans, which is a risky way to get money, any loan will affect the borrower’s credit rating. Although it is not advisable to take out a loan just to improve your credit score, it can help you improve your credit or even start to build credit if you do not have any financial history.

Your credit will be affected one way or another with short term loans so the key to improving your creditworthiness is to make all the payments on time. Even one late payment can have a negative impact since it will be reported to the credit bureaus. On the flip side, making all the payments on time will also be reflected in the information credit bureaus have about you and will help increase your credit rating.

There are two other credit factors to consider when taking out short term loans. Successfully paying off the loan on time with regular payments will increase your chances of securing loans in the future, which could be particularly important for “big ticket’ items that require a larger, long term loan. Having too many loans at once can affect your ability to get another loan when you need one. It is most helpful to pay off a quick loan before applying for another one.

How to Approach Securing a Short Term Loan

It is always helpful to be aware of your credit standing whether you are applying for loans, credit cards, housing, or any other financial responsibility as it will affect your interest rate and what kind of offers lenders can make to you.

There are many credible lenders from banks and credit unions to online financial companies. As the borrower, you have the opportunity to choose what is best for you so it pays to do your research on loans and the credibility of the lender. 

NerdWallet is one company that gives information on all kinds of financial decisions you may need to make. They include specific recommendations about what to look for in short term loans, including guidelines from the non-profit Pew Charitable Trusts. 

They suggest that the monthly payments do not exceed 5% of your monthly income and that monthly payments are fixed, generally for a term between three and 12 months. Your specific financial situation may allow you to have a more flexible payment plan, but that is generally less advisable due to unknown circumstances that may arise.

The Loan Application Process

Once you have checked your creditworthiness and done your research, it is time to apply with a credible lender with clear and understandable terms of the loan. You will need to provide identification as well as financial and employment documents. Recent bank or credit union statements, as well as W-2 forms and recent pay stubs, will show the lender that you have the means to pay back the loan.

Even if you apply online, which may be the quickest and most convenient way for you, you will still have the ability to submit your documentation. If you have concerns about providing this information through the internet, choosing a brick-and-mortar bank or credit union may be the better option for you.

The approval process for short term loans is usually very fast, often even the same day the application is submitted. Within a few business days, you should have the money in your account. Now it’s time to use the money for whatever purpose you needed the loan for and to make regular payments to start paying down the loan.

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