Table of Contents
- The Basics on Short-Term Loans
- How Does A Short-Term Loan Work?
- What Can You Use a Short-Term Loan For?
- How Long Is a Short-Term Loan?
- Characteristics of Short-Term Loans
- Benefits of a Short-Term Loan
- Disadvantages of a Short-Term Personal Loan
- Types of Short-Term Loans
- Short-Term Loan vs Long-Term Loan
- Typical Requirements to Get a Short-Term Loan
- Can I Get a Short-Term Loan With Bad Credit?
- Personal Loan Options From SoFi
- FAQ
Once you begin looking for financing options, you may find your search leads you to multiple forms, including personal loans. One choice available to prospective borrowers is a short-term loan.
A short-term loan is a personal loan that can help with personal financial needs. But this type of loan may not fit every situation, since it typically only provides limited funds. Read on to find out whether a small-term loan may help you meet your financial goals.
Key Points
• Short-term loans offer smaller borrowing amounts, often without collateral.
• Interest rates and fees for short-term loans are higher than long-term options.
• Approval for short-term loans is faster, with less stringent credit checks.
• Repayment periods are shorter, sometimes requiring weekly payments.
• Short-term loans can lead to a cycle of debt due to strict repayment terms and high costs.
The Basics on Short-Term Loans
When you take out a short-term loan, you borrow funds to address immediate financial needs for a limited period. These loans serve a variety of functions, depending on your situation. For example, individuals may take out a short-term loan to keep them afloat until their next paycheck.
Or, someone running their own business who needs to cover small expenses may take out a short-term business loan.
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How Does A Short-Term Loan Work?
Essentially, small-term loans operate on a short time scale. The approval process and repayment schedule occur quickly, usually within a year.
Average personal loan interest rates range from an annual percentage rate (APR) of 5.99% to 36%, depending on the applicant’s creditworthiness. Short-term loans tend to be near the higher end of this scale, in addition to fees and penalties that may be charged by a lender.
However, lenders such as banks or credit unions offer varying personal loan terms and rates. So, it’s important to research and shop around before you apply for one.
What Can You Use a Short-Term Loan For?
Short-term loans can be used for many purposes when you need quick access to money and your cash flow is low. You can use the funds from a short-term loan to cover unexpected costs such as medical bills or for everyday expenses until you reach your next paycheck.
Businesses might use short-term loans in the form of merchant cash advances so they can replenish inventory or purchase new equipment even when short on cash. In this scenario, the business receives a lump sum of cash from a lender and repays it with a percentage of credit or debit card sales until the advance is paid in full.
A bank overdraft can be considered a short-time loan the bank provides when your account balance isn’t sufficient to pay for a purchase you’ve made. In this scenario, your account lacks funds to make a payment, but the bank lends you that money. In return, you pay a fee.
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How Long Is a Short-Term Loan?
Every loan varies based on the lender and applicant. Often, short-term loans mature within a year or less. However, it is possible to find a short loan term that extends up to two years. A long-term personal loan is an alternative if two years is too brief a repayment time frame.
Characteristics of Short-Term Loans
Short-term loans have unique features, such as:
• Smaller borrowing amounts compared to other loans.
• Typically offered as unsecured loans.
• High annual percentage rates (APRs).
• Short repayment periods.
• Sometimes weekly payments are required.
Benefits of a Short-Term Loan
Short-term loans come with certain disadvantages, mostly due to their high interest rates. But they can be helpful if you find yourself in a tight spot. Some benefits include:
High Approval Rates
Since short-term loans only provide limited funds, the lending requirements may be easier to meet. Because of that, more applicants have a chance of approval. Even though you may not need a stellar credit score, you could still have some trouble if you have a low credit score. Your lender may ask for proof of a steady income, among other criteria.
Online Application
Short-term loans are also easy to access. Lenders often offer online applications, so there’s no need to visit a brick-and-mortar office. Applications are typically easy to fill out, taking only minutes to complete.
Quick Access to Funds
The short-term loan processing time is usually fast. As a result, you will probably receive approval and loan proceeds faster than you would for a long-term loan. They might be a good option if you have an unexpected expense you need to pay as soon as possible.
Lower Accrued Interest
While short-term loans can come with high interest, they generally have a short time frame. Because of that, there are fewer total interest payments. As long as you pay on time, you could save money on built-up interest with a short-term loan.
Lower Credit Score Requirements
As mentioned above, you don’t typically have to have an excellent credit score to get approved for a short-term loan. Applicants with average credit scores may also be able to usually qualify for a short-term personal loan.
No Collateral
When it comes to the difference between a secured vs. unsecured loan, a secured loan means more risk on the borrower’s part. That’s because a secured loan requires collateral, such as your car or your home. But most lenders don’t require collateral for a short-term personal loan because it doesn’t carry enough risk.
Disadvantages of a Short-Term Personal Loan
While short-term loans are easier to qualify for, they may not be the right choice for everyone. Here are some drawbacks to be aware of:
Lower Limit
For borrowers who need a significant amount of money, a short-time loan may not be the right choice. The borrowing limits for these types of loans tend to be small, sometimes just a few hundred dollars, to make it easier to pay off in a short amount of time. How much you can borrow with a personal loan will ultimately depend on your credit score, other debts, income, and the lender’s internal rules.
May Lead to a Cycle of Debt
Because of the high-interest rate and steep fees attached to short-term loans, they really aren’t long-term solutions. They might be an option in an emergency but can lead to a cycle of debt if relied on too often.
Types of Short-Term Loans
There are a few variations on the short-term loan available. The type of personal loan you apply for will generally depend on the amount of cash you want and how quickly you need it. Here are different short-term borrowing options:
Payday Loans
A payday loan is a very-short-term loan that some people use to tide themselves over financially until their next paycheck. The funds are meant to be repaid at the time of the borrower’s next payday — thus, the name. However, payday loan issues arise if the borrower can’t repay the loan in the short time frame required.
Installment Loans
Installment loans give borrowers a way to access a lump sum of money that’s repaid in monthly installments over a set time frame. A fixed-rate loan with steady monthly payments makes budgeting during the repayment period more convenient.
Lines of Credit
A line of credit is similar to a credit card. You receive a credit limit and can tap into the line of credit as needed. Funds can be taken out in installments of the amount needed at the time they’re needed. But you can’t surpass your limit, which the lender bases on your creditworthiness.
Merchant Cash Advance
Merchant cash advances are used by businesses that make mainly debit or credit card sales. As a means to secure cash, the business will borrow a lump sum, which is advanced against the business’s daily sales. The lender is then repaid through a certain percentage of the business’s daily sales.
Invoice Financing
Similar to merchant cash advances, invoice financing is a type of short-term loan that can help business owners meet financial needs. The business submits unpaid invoices, i.e., accounts receivable, to a lender as collateral. The lender charges a fee for the financing and can collect on the invoices if the borrower defaults.
Short-Term Loan vs Long-Term Loan
It’s always important to know your options. Short-term loans probably aren’t the right choice if you need a large amount of funds in a lump sum or will need to periodically draw small amounts from a set amount of credit. In these situations, a long-term loan might be a better solution.
Like any form of financing, personal loans have pros and cons. Long-term personal loans can sometimes have high interest rates depending on the applicant’s credit score and other factors used by the lender. They may not require collateral, which makes them seem risky to lenders.
Which Is Right for You?
Here’s a breakdown of how these two loans stack up against each other:
| Short-Term Loans | Long-Term Loans | |
|---|---|---|
| Loan Amount | Typically, a few hundred to a few thousand dollars, but can be up to $100,000 | Depending on the lender, amounts can be a few thousand dollars to $100,000 or more |
| Loan Term | A couple of weeks to 18 months | Typically two to seven years, though can extend up to 25 years |
| Interest | High interest rates | Competitive interest rates |
| Eligibility | May qualify with bad credit | Stringent qualifications such as good credit |
Typical Requirements to Get a Short-Term Loan
Requirements to be approved for a short-term loan vary by lender, but most lenders will evaluate your creditworthiness in some way. Generally, a higher credit score will likely secure you better terms and interest rates. You also need to be able to show your lender a range of personal and financial information. Typical personal loan requirements include proof of identity, verification of employer and income, and proof of current address.
Can I Get a Short-Term Loan With Bad Credit?
While short-term loans don’t typically require excellent credit, the higher an applicant’s credit score, the better their chances of approval. A lender may also offer more favorable interest rates and terms to a borrower with a higher score. Since short-term loans are often for relatively small amounts of money, requirements tend to be more relaxed.
Personal Loan Options From SoFi
If you’re looking to borrow money and wondering where to get a personal loan, make sure you understand what a personal loan is before you move forward. SoFi offers personal loan options to fit a variety of financial situations and needs. With competitive interest rates and a range of terms, there may be a SoFi personal loan that works for you. SoFi does not charge hidden fees on personal loans, many borrowers only repay the loan principal plus interest. A personal loan calculator can help you compare loan options and figure out monthly payments.
The Takeaway
What is short-term lending? It’s a small loan that’s designed to be repaid quickly, usually within 12 to 18 months and sometimes in as little as two weeks. Short-term personal loans vary based on your financial situation and the lender you use. Some lending institutions use high interest rates and hidden fees that can add to the overall cost of a short-term personal loan. That doesn’t make the loan bad, but it’s important to be aware of what you’re agreeing to when you borrow money.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
FAQ
What is short-term lending?
Short-term lending is any loan that has a very brief repayment period, typically under 18 months and in some cases as little as two weeks.
How do short-term loan interest rates compare to long-term loans?
Short-term loans typically have higher interest rates than longer-term ones because there is often more risk involved for the lender, and the lender has a shorter period of time in which to profit off the loan.
What credit score do I need for a short-term loan?
The credit score needed for a short-term loan will depend on the source of the loan and the lender’s policies. It may be possible to get a short-term loan with a poor credit score (under 600). And payday lenders usually don’t check the credit score at all. However, they may charge much higher fees than other types of lenders.
Can I pay off a short-term loan early?
It may be possible to pay off a short-term loan early, however some lenders have early payment penalties. Check your loan agreement for details.
What happens if I can’t repay a short-term loan on time?
Failing to make payments on a short-term loan will lead to different results depending on the type of loan you have. Many payday loans (and their associated fees) automatically renew if they are not repaid on time. Fees can grow so fast and so high that the borrower has difficulty getting out of a financial hole. Other loans may not automatically renew, but borrowers may find themselves in collections or in court, and could see long-term damage to their credit score. If you are having difficulty making payments, don’t wait: Contact your lender to try to work out a payment plan.
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