How Does a Short-Term Loan Work?

Short Term Loans November 25, 2019

Guide To Short Term Loans
What is a Short-Term Loan?
How does a Short-Term Loan Work?
What are Short-Term Loans Used For?
What is an Example of a Short-Term Loan?
Do Banks Give Short-Term Loans?
How Long is a Short-Term Loan?
How do I Qualify for a Short-Term Loan?
What are the Benefits of a Short-Term Loan?
What are the Drawbacks of a Personal Loan?
Is a Short-Term Loan Right for Me?

Financial emergencies can hit anyone at any time. Even if you have a good job and are careful about budgeting and managing your money, unexpected expenses can sneak up when you least expect them. That’s where short-term personal loans come in. Short-term loans are a financial tool used to help you get out of a tight spot when bills are high and money is short.

Is a short-term personal loan right for you? Have you been wondering how a short-term loan works? This ultimate guide to short-term loans will help you understand how short-term loans work and the advantages and disadvantages.

What is a Short-Term Loan?

A short-term personal loan is different from a traditional personal loan. A personal loan is a large sum of money borrowed from the bank that must be repaid, with interest, over the course of several years or more.

A short-term loan is a smaller loan that is paid back over a shorter period. This payment period depends on the lender and the type of short-term personal loan, but it may range from a few weeks to a year. Typically, to get a short-term loan, you go through an application and approval process with a lender, such as a bank, credit union, or other financial institution. [1]

Every lender and loan application process is slightly different. But in general, short-term loans look like this:

1. Apply for the short-term personal loan, usually with an online or storefront lender, or other financial institution. Some loan applications can be completed online, and others are completed in person or over the phone.
2. Next, the lender will review your application and evaluate your financial history, usually by performing a credit check or reviewing your paychecks. Most short-term loan providers will get back to you within a matter of days, or even hours.
3. If your application is approved, the lender will send you a loan offer. This loan offer will include terms and conditions, and will specify your interest rate, loan amount, and repayment period. Make sure you read the loan offer carefully and ask any questions you may have before agreeing.
4. Once you accept the loan offer, the money will be deposited into your bank account, usually within 24 hours.
5. According to the terms of your loan, begin repaying the loan back. Some will require minimum scheduled payments. Make sure to make every payment on time to get the loan repaid within the specified term to avoid hefty fees and interest rates.

What are Short-Term Loans Used For?

There are many reasons why someone might need a short-term personal loan. You don’t need to justify your need to the lender, but you might want to consider carefully if a short-term loan is right for you and your family. Typically, a short-term loan is used as a tool to deal with a sudden or unexpected financial burden, or an immediate expense that simply outpaces your ability to pay.

Some examples of why people seek short-term personal loans include:

- Medical Bills. If you or a member of your family has a medical emergency, unexpected illness, or devastating injury, the bills can pile up. You may need a short-term loan to help pay for medical bills, along with the expenses that come with recovery, including car repairs and helping make ends meet while missing work.
- Car Repairs. If you’ve been in a car accident, or your car is aging and needs some work done and parts replaced, a short-term personal loan can help you take care of the expenses up front so you can get back to work.
- Home Repairs. Damage to your home can be costly and inconvenient. If your hot water heater breaks, your pipes calcify, or your roof leaks, repairs can be expensive. You can’t afford to save up for a new roof if it is damaged and leaking now; a short-term personal loan will help you get your home in working order right away. Some people may choose to use a short-term loan to pay for non-essential renovations to their home to prepare to sell it.
- School Expenses. College and private school tuition can be very expensive, and is often charged once or twice per year. A short-term personal loan may help you pay you or your child’s tuition when it’s due, while paying it back gradually over the next few months.

Typically, it is not recommended that you seek personal loans for expenses that fall under the “want” category, such as a new gaming system, car stereo, or family vacation. Ultimately, it is up to you to justify and decide how you will spend the money from your short-term loan. [2]

What is an Example of a Short-Term Loan?

There are many types of term loans and payday loans. To figure out the best short-term loans for you, consider this list of loan types.

Installment Loans or Cash Advances

Installment loans are very flexible, and are great for one-time expenses and smaller loan amounts. An installment personal loan is paid back—in installments—over a determined number of scheduled payments over a specified time period. This structure makes it simple for consumers to get the money they need, understand the repayment requirements, and make payments on time.

Payday Loans

These short-term loans have a very quick turnaround. The idea is that you can receive up to $1,000 or more in cash or direct deposit the same day you apply, and you’re expected to pay the money back once you get your next paycheck. However, these loans typically aren’t very flexible, and if you aren’t able to pay the loan back in full on payday, you could be facing some steep interest charges that make the loan extremely expensive. If you aren’t careful, payday loans can send you into a spiral of debt. [3]

Credit Card Cash Advance

This short-term loan example is another highly convenient, but risky option. If you have a credit card, you can head to any ATM and use it to “withdraw” cash, just as you would with a debit card, but with one major difference: instead of coming from your checking account, the cash counts against your credit limit, and it carries interest rates and hefty fees, up to as much as 5% of the amount borrowed. [4]

Do Banks Give Short-Term Loans?

Once you’ve decided to seek out a personal short-term loan, the next step is to decide where to get one. There are several options for lenders out there, from your local bank to online institutions that specialize in short-term or payday loans.

Short-term loan lenders include credit unions, banks, online lenders, and storefront lenders. Each will offer different loan products, with their own application requirements, loan amounts, interest rates, and repayment policies. Your best bet is to reach out to your bank to see what personal short-term loans are available. Not all banks offer short-term loans, especially loans in smaller amounts to be repaid over a short time. Research reputable companies and lenders in your area to find the type of short-term loan for you. Try searching “short-term loans near me” and investigating reputable companies further.

How Long is a Short-Term Loan? How Much Does it Cost?

A short-term loan is one that is repaid within a year from the day the money is received. Some loans, such as payday loans, have an even shorter payment period, and others may be up to two years.

To make sure that the loans are paid back on time, payments are sometimes setup every week, rather than every month, as you see with a more long-term personal loan. The fees and interest rates tend to be higher, but if you make your payments, in the long term you will be paying less in many cases. For example, if you make fewer payments with a higher interest rate, you’ll be spending less money than making more payments with a lower interest rate. So, while short-term loans look expensive, they can save you money over a traditional personal loan.

How Do I Qualify for a Short-Term Loan?

The type and terms of your short-term credit loan depend on a variety of factors. These may include your credit score and employment status. Having poor credit doesn’t necessarily mean you won’t qualify for a short-term personal loan, but it might result in a higher interest rate. Your individual lender should be able to let you know within hours of applying if you qualify for a short-term loan. [5]

What are the Benefits of a Short-Term Loan?

There are many reasons why a short-term loan is beneficial to borrowers. Here are a few of the pros of taking out a short-term loan:

- Cash Fast: If you’re in a tough situation and need money immediately, a short-term loan can be a huge help, getting money in to your bank account within a business day of applying for the loan. When you face an unexpected expense, short-term credit gives you immediate relief.
- Flexibility: The best short-term loans and lenders are willing to work with you to agree on terms and repayment periods that work with your needs. This is especially true of installment loans, but not necessarily of payday loans.
- Poor Credit is OK: Even with bad credit, you may be approved for a short-term personal loan. Many lenders just require that you can show you have a regular income. Good credit may influence your interest rates, but not your approval.
- No collateral required: Some long- or medium-term loans require you to tie up your assets, such as your car, house, or business, in your personal loan, putting these things on the line if you default. Short-term loans do not require collateral.
- Limited Paperwork: The application procedure is simple and quick. It can be completed online, in person, or over the phone, and is typically a painless process. In most cases, you’ll be informed of your approval status within hours.

What are the Drawbacks of a Personal Loan?

Personal loans can really help you out in a difficult situation. But before you decide to take one on, research the pros and cons of a personal loan so you better understand if it is something you can benefit from. As part of your decision, consider these drawbacks to taking out a personal loan.

- High interest rate: Short-term loans are among the most expensive types of loans out there when it comes to fees and interest rates. Make sure you’re able to make your payments on time before signing onto a short-term loan or risk being saddled with some heavy debt.
- Payment frequency: Some people have a hard time making regular payments, especially weekly or bimonthly payments. If your loan requires weekly payments, consider your ability to actually pay the minimum payment that frequently.
- Fees: In addition to interest rates, there may be high fees associated with your loan. These fees may be for late payments or for the origination of the loan.
- Short-term solution: While short-term credit can really help out in a sticky situation, it is not designed to be a solution to long-term financial problems. Try to use these short-term solutions only in a truly dire situation, not as a way to put off getting into debt or better managing your money.

Is a Short-Term Loan Right for Me?

Only you can decide if a short-term loan is right for you in your situation. Consider a variety of factors, including why you need the loan, your money management skills and ability to pay the loan back, and the pros and cons of a short-term loan. If you work with a flexible lending company and are willing to make each payment on time, a short-term loan can be an effective and affordable solution to a difficult time.