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Understanding Short-Term Personal Loans
No matter how prudent you are with your money, a sudden and immediate expense can wreak havoc on your financial health. One way to offset this financial dilemma is by reaching out to family or friends that can offer you a loan. However, sometimes your connections do not have extra cash, too, which is why you need a short-term personal loan.
Short-term personal loans are types of borrowings that do not need to be secured with collateral and may be granted to a borrower with a stable source of income. Find out why a short-term personal loan is a viable option for your financial situation.
Getting a Short-Term Personal Loan
If you have tried getting a regular personal loan in the past, you know that this type of loan takes years to pay off. A short-term personal loan, as its name suggests, is a loan designed to cater to borrowers who prefer to settle their debt within a year or shorter. There are different kinds of personal loans but most lenders will assess your creditworthiness before granting you a loan. Here is a look at how short-term personal loans work:
- Choose whether to send your loan request to a storefront or online lender.
- After checking your financial status and credit history, the lender decides to approve or reject your request.
- Once the lender approves the loan application, he or she will offer you a loan amount together with the terms of payment and interest rate. Most short-term lenders will be able to provide feedback for loan requests within an hour.
- If you agree to the terms and conditions of the loan, you will receive the money from the lender. Transfer times may vary but many short-term loan providers will likely send the money within the day, or the following business day.
Different Types of Short-Term Personal Loans
Short-term personal loans is an umbrella term for different types of loan product with a short repayment period. Most short-term unsecured loans are obtained to resolve a small, but sudden, cash shortage. Find out what types of short-term personal loans are available in the market.
There are various sources of short-term loans such as banks, traditional lenders, credit unions, and online loan providers. Depending on your qualifications, a bank and traditional loan provider may approve or reject your loan request. You can also reach out to a credit union or online lender for non-traditional short-term personal loans.
One example of an unsecured, short-term loan from an online lender is a payday loan. Because you have to pay back the amount you borrowed on your next paycheck, it may be challenging to pay back the debt in such a short time. Add to that, payday loans are accompanied by fees and interest rates that make it very expensive to afford.
Payday loans are regulated by state authorities, including the fees and interest rates that the loan provider can apply to the borrowing. There are some states that do not authorise payday loans as a form of credit. Many borrowers experience greater financial hardship after taking out a payday loan and rolling over the debt to another pay period because they cannot afford repayments. Payday loans, therefore, must only be considered as a last option.
Interest Rates of Short-Term Personal Loans
A short-term personal loan does not come cheap. While it may be tempting to get a personal loan for no special reason, remember that the finance charges that go with these types of credit are very high. It can be challenging to bounce back from a short-term personal loan especially if the loan is renewed every month.
The interest rate that will be applied to your loan will depend on several things: the lender’s discretion, the type of loan you are applying for, and your credit history. The APR of payday loans can go as high as 400%, not yet including the other fees that you have to pay for.
It is crucial to perform ample research before accepting any loan offer. This allows you to compare terms and loan amounts so that you can the most suitable loan offer for your qualifications and needs.
Short-Term Loan Benefits
Many will say that a short-term loan is not the best loan option because of its exorbitant rates and fees, but it can be a lifesaver when you’re pressed for money. Short-term loan benefits include:
- Quick Cash: Do you need money right away? A short-term loan allows you to access fast cash when you experience a sudden cash shortage.
- No Need for Collateral: Short-term unsecured personal loans do not require any collateral as security for the borrowing. You will be able to access emergency cash without attaching any of your belongings to the loan.
- Get Approved Even if You Have Bad Credit: If your credit is anything but good, you can still apply for a short-term personal loan and get approved. Online lenders will look at your source of income and monthly compensation to determine if you are qualified for a loan.
- Pay Off Your Debt Fast: You can get over your debt fast with a short-term loan. Unlike other personal loans that take a year to repay, short-term loans can be settled in a month or so.
- Flexible Payment Plan: If you take out a short-term loan from an online lender, you can request a payment plan that is tailored to your preferences and requirements. It is best to check with your lender if it is possible to have a payment plan that meets your financial capacity.
Short-Term Loan Disadvantages
While short-term loans have several benefits to borrowers, it also has some disadvantages in comparison to other loan products. Short-term loan disadvantages include:
Sky-high Rates: Short-term personal loan products are known to have higher interest rates compared to long-term loans. If you decide to take out a short-term loan, you should expect to have an expensive total loan cost.
Expensive Fees: Be prepared to pay for several fees when you take out a short-term personal loan, such as origination fees, processing fees, and penalties for late payments.
Temporary Relief: While a short-term loan can help you get past the immediate and urgent money shortage, the high-interest rates and unreasonable terms make it unsuitable as a long-term solution for financial problems.
Will My Credit be Affected by a Short-Term Personal Loan?
Taking out any kind of loan will have some effect on the borrower’s financial history. The effect on your credit history will depend on how the lender performs a credit check. A hard inquiry will likely bring your credit down a notch.
Your credit score will likely be affected if you miss a payment towards your personal loan. Short-term personal loans also increase your debt load so your credit score can be adversely affected.
For borrowers who want to build or improve their credit, payday loans cannot help since credit bureaus receive a report of such borrowing. Some loans that are reported to credit agencies can help boost your credit once you are paying on time.
The Process of Taking Out a Short-Term Personal Loan
Obtaining a short-term personal loan is simple and straightforward. The entire process is explained in these steps:
Credit score verification: Lenders use your credit score to assess whether you are a risky borrower or not. If your credit score is high, you will likely enjoy better terms and interest rates than with poor credit scores. If you wish to obtain a loan with competitive terms and rates, you should work on improving or building it.
Choose the product wisely: Finding a reputable lender requires careful research and consideration. Remember that lenders’ terms and rates vary which is why you should understand them first before agreeing to any loan contract. Lenders have certain requirements and criteria for eligibility so always check that you are qualified before submitting your loan request.
Prepare the necessary documents: Upon applying for a loan, the lender will request personal and financial information supported by a valid ID, bank statements, income tax forms, and more. If you chose to apply to an online lender, you can simply accomplish the application form and submit the documents over the Internet. Applying for a loan from a storefront lender means you have to submit the documents personally at the lender’s office.
Wait for feedback: The great thing about short-term personal loans is that you can find out the lender’s decision on the same day that you submitted your loan request. You can receive the funds requested on the same day or the following business day through check or direct deposit.
A short-term personal is a viable solution if you have to take your child to the hospital for an emergency, or there’s a leak on your roof which must be repaired immediately. A short-term personal loan does not have to be a nightmare. With proper consideration and research, you will find a lender who offers reasonable terms and rates. To make your experience worthwhile, always seek the help of a reputable lender, read the terms and conditions carefully, and always pay your dues on time.