The Benefits and Drawbacks of Short-Term Loans

April 20, 2018 · Posted in Finance, Loans 

What are short-term loans? As the name suggests, short-term loans are borrowed and repaid within a relatively short amount of time. This brief period reflects the fact most loans of this type tend to be under a few thousand dollars. While short-term loans are offered by banks, there are other types of lenders offering these increasingly popular financial products.

What are the Benefits of Short-Term Loans in Comparison to Other Loans?

The requirements for obtaining a short-term loan tend to be much easier to meet than longer-term loans. In addition, you can get approved for a short-term loan much more quickly than a long-term one. After you are approved, the money will be deposited more quickly with short-term loan solutions than a long-term loan. In many cases, the funds are deposited as soon as the next business day.

Short-term loans generally offer more flexibility than long-term loans. Also, you don’t have to list collateral to get a loan advance approved if proof of income is provided. In some cases, the amount of money that you will be able to borrow will depend more on the amount that you are currently earning than your credit score. Furthermore, the credit score required for a short-term loan is generally significantly lower than with a long-term loan commitment.

Depending on the lender-borrower situation, a short-term loan might be able to keep your business running until you are able to find other ways to pay your business’ expenses. In addition, short-term loans can be great for business owners who want to expand and people who are just starting a business. In many cases, lenders that offer long-term loans will only allow you to borrow if you have been in business for a long period of time.

What are the Drawbacks of Short-Term Loans?

If you do not pay back a short-term loan on time, you could face substantial fees. These fees are often larger than the fees that are associated with not paying back a longer-term loan on time. Furthermore, short-term loans tend to have high-interest rates than longer-term loans. It often isn’t practical to borrow as much money with a short-term loan as you could with a long-term one.

Also, short-term loans often come with a larger monthly payment than longer-term loans. This is because of the fact that you don’t have as long to pay them off and the higher interest rates. In addition, the lender could renew the terms of a short-term loan in a way that makes paying back a loan on time more difficult. Lastly, like with any loan obligation, a failure to pay on time or pay the full amount will result in a major hit to your credit. Such a negative mark would be difficult to fix for even the best credit repair services currently available.

While the speed that the money is deposited into your account is often an advantage, it also can be a disadvantage. If you use a short-term loan to attempt to get yourself out of difficult times, the high monthly payments and interest rates of short-term loans could cause you to experience more financial strain.

Many lenders that offer short-term loans are reputable, but there also are a lot of unscrupulous lenders that offer short-term loans. Therefore, you may have to take more time to research whether the short-term loan that you are considering is offered by a reputable company. Luckily, if you are borrowing from a major bank, this shouldn’t be a concern.

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