Short term loans can provide quick access to cash during times of financial need. However, these loans come with higher interest rates and fees compared to longer-term financing options. This guide will explore what short term loans are, their pros and cons, alternatives, and tips for prudent use to avoid debt traps.
What Are Short Term Loans?
A short term loan is a type of financing that is intended to be repaid over a short period of time, usually within 1 year or less. These loans are designed to meet immediate, short-term cash needs until the borrower has the ability to repay the balance.
Common examples of short term loans include:
- Payday loans – These small loans are due on the borrower’s next payday, typically within 2-4 weeks.
- Installment loans – These are repaid in multiple installments over 3-12 months.
- Title loans – These use the borrower’s vehicle as collateral for a 1-month loan.
- Lines of credit – Revolving credit lines allow multiple withdrawals up to a set limit.
- Cash advances – Credit card cash advances provide quick funds but charge interest immediately.
Typical uses of short term loans include emergency expenses, medical bills, home or car repairs, consolidating other higher-interest debt, or covering cash flow gaps between paychecks.
The maximum loan amount offered depends on factors like income, credit score, and the lender. Payday loans range from $100-$1000. Installment and title loans provide $100-$5000. Credit lines and cash advances depend on the card limit.
Short Term Loan Approval Process
The application and approval process for short term loans is designed to be quick and streamlined compared to longer-term options like personal bank loans.
Requirements are minimal. Most lenders just require:
- Legal adult status (age 18+)
- Valid government ID
- Checking account
- Proof of income
Many lenders do not base approvals on credit scores or histories. Income verification and employment status are bigger factors.
The application process is simple too. Many lenders accept online applications that take minutes to complete. Approvals are fast, often instant or within 1 business day. Funds disbursal into the borrower’s bank account is also quick, within 24 hours in most cases.
This accelerated process enables borrowers to rapidly access emergency cash when needed. However, the simplified vetting also increases risks for lenders, contributing to higher interest rates.
Interest Rates and Fees on Short Term Loans
The biggest drawback of short term loans is that they come with very high interest rates and extra fees compared to longer-term alternatives like personal bank loans or lines of credit. This is the tradeoff for quick access to cash without traditional credit checks and criteria.
Here are typical rates and fees seen with different short term loan options:
Payday Loans
- Interest rates of $15-$30 per $100 borrowed, equivalent to 390%-780% APR.
- Fees of up to $10-$30 per loan.
Installment Loans
- Interest rates of 30%-178% APR.
- Origination fees of 1%-10% of loan amount.
- Late fees of $15 or more.
- Prepayment penalties of up to 30 days interest for paying off early.
Title Loans
- Interest rates of 25%-30% per month, equivalent to 300% APR.
- Origination fees of $25-$50.
Credit Lines and Cash Advances
- Interest rates of 28%-36% APR typically.
- Cash advance fees of ~5% of withdrawal amount.
These high costs quickly multiply the total repayment amount. A $500 payday loan can end up costing over $600 with fees and interest within just 1-2 weeks.Rolling over loans repeatedly creates a debt spiral as new loans cover old interest charges.
Pros of Short Term Loans
Despite higher costs, short term loans remain popular due to some advantages:
Immediate access to cash – Funds are deposited directly into checking accounts within 24 hours in most cases. This enables paying for sudden expenses without waiting days or weeks for approval like normal loans.
Higher loan amounts – Short term loan limits can reach $5000+ for installment loans versus $1500 average for credit cards. This provides access to larger lump sums.
Easy qualification – Minimal eligibility requirements and quick approvals help borrowers with poor credit or incomes access loans using just a checking account and employment proof.
Multiple purposes – Short term loans provide financing for nearly any legal purpose from emergencies to medical bills to vacations.
For qualified borrowers facing temporary hardship, short term loans can be an important source of fast financing when used prudently and repaid on time.
Risks and Downsides
However, short term loans also come with considerable risks and downsides:
Debt traps – Repeated renewals or rollovers to cover old loan principal and fees create a cycle of growing debt. A $500 loan can become $2000+ owed over months of rollovers.
Very high costs – Triple digit interest rates and fees make these options much more expensive than alternatives like credit cards or personal loans.
Risk of default – Missed payments lead to aggressive collection efforts, damaged credit, vehicle repossession, wage garnishment, and lawsuits in extreme cases.
Credit impact – Late or missed payments get reported to credit bureaus, lowering scores. This reduces future access to reasonably priced loans.
Predatory lending – In some states, unregulated lenders exploit borrowers through misleading terms, abusive collection tactics, or outright fraud.
For borrowers already in financial hardship, short term loans can exacerbate money issues. They are best used with caution.
Alternatives to Consider First
Given the high costs, short term loans should not be the very first choice. Safer and cheaper alternatives to explore first include:
Savings – Emergency savings funds prevent the need for debt during hardship. Even small cash reserves are safer than high-interest loans.
Borrowing from family/friends – For reasonable needs, private loans from people you know often charge little to no interest.
Credit union loans – Credit unions offer affordable short term loans at lower rates for members. Loan amounts are often a few thousand dollars.
Credit cards – Despite high rates on cash advances, overall credit card interest rates remain lower than most short term loan options if used prudently.
401k/retirement plan loans – For those with sufficient savings, borrowing against your own retirement funds provides access to cash at lower interest than other options.
Personal bank loans – Taking out a longer-term installment loan at a bank provides access to larger amounts at lower rates, though approval requires good credit.
The key is to exhaust more affordable financing options first before considering costlier short term loans for temporary funds access.
Tips for Safe Usage
If a short term loan is ultimately needed, here are some tips to use them prudently:
- Shop lender rates online – Compare offers from multiple online lenders to find the best terms for your situation. Avoid very high rate players.
- Budget for repayment – Have a realistic plan to fully repay the loan within the term to avoid rollovers. Factor the payments into your regular expenses.
- Read all terms closely – Understand the full costs, loan structure, defaults, and lender rights to avoid surprises.
- Limit loan purpose – Use funds only for the emergency in question, not for discretionary purchases that worsen debt.
- Pay back early – Prepay principal anytime you have extra funds to minimize interest costs. But check for prepayment penalties.
- Avoid repeat loans – Getting trapped in a cycle of recurring short term loans to repay old ones leads to escalating debt.
- Have an alternative plan – If unable to repay during hardship, proactively communicate with the lender early to modify terms or request extensions. Avoid defaults if possible.
- Get credit counseling – If already struggling with high-interest debt, seek help from a non-profit credit counseling agency for managing payments.
With careful usage, short term loans can assist in overcoming temporary emergencies. But improper use often leads to spiraling debt issues that worsen financial health.
Key Takeaways
- Short term loans provide fast access to funds for immediate needs but carry very high interest rates and fees.
- Alternatives like savings, credit cards, friends/family, or credit union loans should be explored first before considering short term financing.
- Read all loan terms closely and have a realistic payoff plan before borrowing to avoid rollovers and debt traps.
- Limit loan use to emergency needs only, not discretionary purchases. Avoid repeat borrowing cycles.
- Compare lender rates online and focus on reputable regulated players, not predatory lenders.
- With prudent use, short term loans can assist during temporary hardship, but they aren’t a long-term financial solution.
Frequently Asked Questions
Q: What are the easiest short term loans to qualify for?
A: Payday loans typically have the lowest eligibility barriers as they require just ID, income verification, and a checking account. Approval is fast with minimal credit checks. However, payday loans also tend to have the highest interest rates, exceeding 300% APR in many cases.
Q: Can I get a short term loan with bad credit?
A: Yes, many lenders offer bad credit loans advertised as “no credit check” loans. Approval is based more on income than credit histories. Interest rates will be higher than loans for borrowers with good credit. Lenders may also limit maximum loan amounts for bad credit borrowers.
Q: What happens if I can’t repay my short term loan?
A: Unfortunately the consequences of defaulting on a short term loan can be severe. The lender may contact you frequently to collect payment, report the missed payments to credit bureaus, sue you, garnish your wages, or repossess collateral like your car title. Some states allow jail time for unpaid payday loans. Communicate with your lender early if struggling to repay.
Q: Are there short term loans that don’t require credit checks?
A: Many online lenders promise no credit checks, but most do perform some basic verification of identity and income capacity. True no credit check loans are very rare. However, short term loan approvals focus less on credit scores compared to approval for credit cards or personal bank loans.
Q: Where can I get short term loans other than payday lenders?
A: More affordable alternatives are available at credit unions, online lenders, pawn shops, and even some banks. Interest rates will likely still be higher than longer term loans but lower than payday lenders in most cases. Look for established regulated lenders rather than “no credit check” loan ads.