Unexpected expenses crop up for a variety of reasons: medical bills, home damages, pay cuts, etc.
Maybe your family breadwinner is out of commission for a few months due to illness or injury—or your family’s primary vehicle needs repairs that you simply can’t afford.
These rainy-day expenses have the potential to blow right through your monthly budget, leaving you short on money for rent and food. In situations like these, many people turn to short term loans or short term financing as a way to pay for unexpected or difficult personal expenses.
Short-term financing is a loan option that offers the recipient borrowed funds for temporary expenses, similar to how a short term loan works? Short term loans offer you borrowed capital that you pay back, plus interest, usually within a year or less. If you’ve come across some hard times and need cash fast, you might consider getting a short term loan.
What is the Purpose of Short-Term Financing
Short-term financing works similarly to a credit card—the loan has a set interest rate, minimum monthly payments, and a grace period that allows you to make interest-free payments.
The big difference between the two is that credit cards operate on revolving credit, making it possible for you to make purchases while you pay off your debt, either in a short period of time or over several years or even decades.
On the other hand, short-term financing provides borrowers with a single lump sum of money, which is often used to solve a short-term issue or pay a one-time expense, such as a car repair or an unexpected medical bill.
Short-term financing provides borrowers with cash quickly, which makes it an excellent option for those who need to secure funds immediately. It also has shorter repayment periods than traditional loans. It’s also useful to individuals who don’t qualify for a line of credit from a bank or whose poor credit scores make securing a credit card difficult.
This shorter repayment period is one of the advantages of short-term financing, because there is less interest accrued over the loan’s lifetime. If you make the payments on the loan on time and pay off the loan on schedule, you can also quickly improve your business credit score.
As you consider whether applying for a short-term loan is right for you, take a look at the top three advantages and disadvantages of short term financing.
what is an advantage of a short-term loan?
There are several reasons why you might benefit from short-term financing. Three of the biggest advantages include:
- A quick payout to get the cash you need when you need it.
- A lending opportunity still available to borrowers with bad credit.
- Flexibility in payment options and structure.
- Less Time to Accrue Interest (Bonus)
1. Quick Payout
If you are in the market for a short term finance option, chances are you need money fast. Luckily, a short term loan application can be approved in a matter of hours.
This is especially helpful in an emergency situation where you need to make a payment as soon as possible.
There’s no lengthy approval process for short-term loans, as you might find with other types of loans.
Most loan applications can be completed entirely online or over the phone. Depending on your bank or lender, you can access the borrowed funds that day, or the following business day.
The money is deposited directly into your account. A huge advantage of short term financing is that they can make a big difference for people who need immediate access to money they don’t have.
2. Opportunity for Borrowers with Bad Credit
Short term loan lenders do not put a huge emphasis on your credit history for approval. More important is proof of employment and a steady income, information about your bank account, and proving that you do not have any outstanding loans.
This is great news for people who have a limited credit history or bad credit.
Your credit history doesn’t have to hold you back from getting the emergency cash you need to cover an unexpected expense. In addition, short term loans have the potential to improve rather than hurt credit.
A short term loan is a good opportunity to improve or build your credit history. As you pay back your loan on time, you’ll see your credit rating improve.
3. Flexibility
Several types of short term loans offer amazing flexibility, which is helpful if cash is tight right now but you anticipate things getting better financially soon.
Before signing for your short term loan, you and the lender will make a schedule for payments and agree to the interest rates up front.
Another advantage of short term financing is that they offer only a short term commitment.
As long as you can pay off your debt on time, typically within six months, you don’t need to worry about a large loan hanging over your head for years—you can focus on the immediate future and getting out of your difficult financial situation.
4. Less time to accrue interest (Bonus)
Time is often a major advantage of short-term financing. While short-term loans tend to have higher interest rates than lengthier loans, they benefit from a shorter period of time to accrue less interest. Since short-term loans are typically paid back within about a year, there isn’t as much time for interest to build up. This helps you manage your debt.
Take a car loan as an example of a longer-term loan with more total interest. Over the life of a six-year car loan at 10% interest, you would pay over $9,000 in interest on a $28,000 loan. That adds nearly 1/3 to the total amount of your loan.
The advantage of short-term financing is that you get a relatively small amount of money right away, and you pay it back quickly. The total interest repaid will typically be much less than on a larger, long-term loan that has more time for interest to build.
Disadvantages of Short-Term Loans
No financial solution is perfect for every borrower. There are potential disadvantages of short term financing. This is why it is important to weigh your options in order to set yourself up for success. Take a look at the three top disadvantages of taking out a short term loan.
1. Higher Interest Rates
The biggest drawback to a short-term loan is the interest rate, which is higher—often a lot higher—than interest rates for longer-term loans. The advantage of a long-term loan is a lower interest rate over a longer period of time.
On top of paying back the short-term loan balance, the interest payments can lead to higher payments every month.
However, keep in mind that with a short-term loan, you’ll be paying back the lender within a short period of time—which means you’ll be paying the high interest for a shorter time than with a long-term loan.
The longer you owe, the more interest you have to pay. Long-term loans may have lower interest rates, but you’ll be paying them over several years. So, depending on your terms, a short-term loan may actually be cheaper in the long run.
2. Potential Damage to Credit Score
While repaying a short term loan on time according to your agreed upon schedule can be a significant boost to your credit score, failing to do so can cause it to plummet.
An outstanding short term loan will increase your debt to income ratio, causing your credit score to take a hit. This can be damaging if you only have a little or good credit history, and devastating to your future potential to borrow if you already have poor credit.
Before taking out a short term loan, be honest with yourself about your ability and discipline when it comes to paying back the loan on time.
3. Debt Cycle
If you have a problem with spending more than you can afford, taking out a short-term personal loan will only perpetuate the problem because you are short on cash. Some people get caught in a cycle of making expensive purchases and then finding themselves short on funds for the necessities, forcing them to take out a high-cost loan.
Then repaying the loan puts another strain on their finances, and if the excessive spending isn’t reigned in, they might need another loan, perpetuating a cycle of accruing and relying on debt.
A short-term loan is best for people in an unexpected emergency situation requiring instant access to cash that couldn’t otherwise be spared.
Contact power finance texas for more info
There are many advantages and disadvantages of short term financing. Considering the top advantages and disadvantages of short term loans will help you decide if this financial tool is right for your situation. If you have any more questions, be sure to contact Power Finance Texas today!