Short term loans provide a valuable financial tool for individuals needing quick access to funds. These loans are designed to offer borrowers short term financing to cover unexpected expenses or bridge cash flow gaps.
In this comprehensive guide, we will explore what short term loans are, their key features, how they work, pros and cons, and alternatives to consider.
What Is a Short Term Loan?
A short term loan is a type of financing that allows borrowers to receive a principal loan amount that must be repaid over a defined short term period, usually between 30 days to 1 year.
These loans are structured to provide fast access to relatively small amounts of capital for temporary or emergency financing needs. The short repayment periods allow borrowers to pay back the money quickly before interest charges accumulate.
Short term lending options include:
- Payday loans – Repaid in full on the next paycheck, usually within 2-4 weeks.
- Installment loans – Repaid in fixed monthly payments over 3-12 months.
- Title loans – Secured by the title to the borrower’s paid-off vehicle.
- Pawn shop loans – Secured by an item of value pledged as collateral.
- Peer-to-peer loans – Borrowed from individual investors rather than a bank.
The quick and easy application process makes short term loans readily accessible for borrowers. Approval decisions are provided in hours or days rather than weeks or months.
Key Features of Short Term Loans
Short term loans have some defining features that set them apart from conventional long term loans:
Duration
- The loan term ranges from 1 month to 1 year.
- Designed to meet short term needs.
- Borrowers repay the money quickly.
Loan Amount
- Typically a few hundred to a few thousand dollars.
- Loan size depends on borrower’s income and lender’s policies.
- Enough to cover an emergency expense or temporary shortfall.
Interest Rates
- Short term loans have higher interest rates.
- Lenders factor in the increased risk with short durations.
- Interest charges accumulate quickly so timely repayment is crucial.
Eligibility Criteria
- More flexible compared to long term loans.
- Regular income source is the key requirement.
- Good credit helps but is not always mandatory.
Application and Approval
- Fully online and automated application process.
- Approval decision provided within hours or a few days.
- Funds disbursed quickly once approved.
How Do Short Term Loans Work?
Here is an overview of the step-by-step process when getting a short term loan:
Researching Lenders
The first step is to research potential lenders and compare factors like:
- Interest rates and fees
- Loan amounts and terms
- Eligibility and required documents
- Application process and timelines
- Customer service and reviews
This helps identify reputable lenders and the best loan offer for your needs.
Submitting the Application
The application process is designed to be simple and fast:
- Completed fully online by filling a form
- Provide personal details like name, contact, income
- Supporting documents may be required
- Digital signatures used for agreements
The top lenders have user-friendly online platforms.
Underwriting and Verification
Lenders will vet applicants carefully before approving loans:
- Verify identity and income sources
- Run credit and background checks
- Assess repayment capacity
- Ensure applicants meet eligibility criteria
This risk assessment is completed quickly using automation.
Receiving a Decision
Applicants are promptly notified if their loan is approved or declined:
- An approval decision can take hours or days.
- The loan offer details the amount, terms, rates, fees.
- Declined applicants can try other lenders.
Quick decisions enable borrowers to rapidly access funds if approved.
Accepting the Loan Offer
If approved, borrowers review and accept the loan offer:
- Carefully review loan amount, interest, fees, terms.
- Accept or refuse the offer digitally.
- E-sign the loan agreement contract.
Borrowers should ensure they understand and agree to all loan details before accepting.
Getting the Funds
Once the agreement is signed, the lender quickly disburses funds:
- The approved loan amount is electronically deposited into the borrower’s bank account.
- Deposits typically hit accounts within 1 business day after approval.
- The borrower can then access the money.
Repaying the Loan
Borrowers must repay the loan per the agreed schedule:
- Repayment periods can range from 2 weeks to 1 year.
- Equal periodic installments are due weekly, biweekly or monthly.
- Late fees or penalties may apply for missed payments.
- Automatic deductions from the borrower’s account are common.
Responsible repayment as per the loan agreement is important. This will limit interest costs and avoid damaging credit scores.
Completing Repayment
The loan tenure ends once the borrower makes all scheduled payments:
- The loan account is closed and settled after the final payment.
- The borrower should receive a paid-in-full notification.
- At this point there are no more obligations related to the loan.
Borrowers should avoid refinancing or rolling over short term loans if possible, as this can lead to a cycle of growing debt. Instead the loan should be repaid fully and account closed on schedule.
Pros of Using Short Term Loans
Short term loans offer certain benefits for borrowers needing quick access to financing:
Speedy Access to Funds
- Online application and approval in hours/days
- Money deposited directly and available quickly
- Addresses urgent or emergency financial needs
Flexible Qualification
- Lenders may use alternative underwriting criteria beyond just credit scores
- Income and employment are often the key requirements
- An option for those with limited credit history
Small and Predictable Payments
- Loan amounts to cover specific needs rather than large lump sums
- Fixed regular installment payments are easier to budget
- Clear payment schedules with total interest costs stated upfront
Can Avoid Credit Damage
- Late fees on utility bills can hurt credit if unpaid
- Short term loan allows catching up while protecting credit score
For the right borrower, a short term loan used responsibly can provide important benefits.
Cons of Using Short Term Loans
However, there are also some potential downsides to weigh:
Very High Interest Rates
- Annual percentage rates can range from 200% to over 500%
- Interest charges add up quickly with short durations
- Borrowers can end up paying several times the actual principal
Risk of Renewals and Rollovers
- Unaffordable loans may need to be renewed with additional fees
- Can create a rollover cycle leading to growing debt
Predatory Lending Practices
- Some lenders use aggressive marketing and collections
- Weak regulation in some states enables predatory lending
- Can take advantage of financially vulnerable borrowers
Insufficient Underwriting
- Income and ability to repay may not be properly verified
- Can approve borrowers for loans they cannot realistically afford
- Potentially leading them into a debt trap
While short term loans serve a purpose, they can also create problems if not used carefully. Borrowers should think twice before taking this route.
Alternatives to Consider
Before deciding to get a short term loan, also consider these options:
Local Credit Union or Bank
May offer small personal loans with more reasonable rates
Payment Plan with Creditors
Explain the situation and request an extended payment plan
Borrow from Family or Friends
A interest-free loan from people you know may be possible
Credit Card Cash Advance
Can access cash, although with upfront fees and high interest
401(k) or IRA Withdrawal
Allows penalty-free access to retirement savings if truly needed
Debt Management Plan
Credit counseling agency consolidates debts into one monthly payment
Peer-to-Peer Lending
Borrow from individual investors; may offer better rates
Depending on the circumstances, one of these alternatives could be a better option than resorting to a short term loan.
Key Takeaways
- Short term loans provide fast access to funds but have very high costs.
- Weigh the pros and cons carefully based on your situation.
- Research lenders thoroughly and compare all options.
- Avoid rollovers; have a realistic repayment plan.
- Consider alternatives like family loans or credit counseling.
- Use short term loans only as a last resort if options are limited.
FAQ
What is the easiest short term loan to get?
Payday loans typically have the easiest approvals as they require minimal eligibility verification beyond income. However, they also tend to have the highest fees.
What credit score is needed for a short term loan?
Each lender sets their own criteria, but### What are the requirements to qualify for a short term loan?
The basic requirements are steady income from a job or other source, legal US residency, and a valid checking account. Proof of income, identity, and a bank statement are typically needed. The lender will check credit reports but having bad credit does not automatically disqualify applicants.
How quickly can I get short term loan funds?
After submitting an online application, a decision is made within a few hours or days at most. Once approved, the loan funds are electronically deposited into your designated checking account, usually by the next business day.
Can I get a short term loan with no credit check?
No lender will issue a loan without any credit screening at all. However, some may only do a “soft” credit check that does not affect your score. Others look at alternative data beyond just a credit score to make lending decisions. But a full credit report will always be obtained.
Where is the best place to get a short term loan?
The best places are reputable online lenders that offer clear loan terms and conditions, reasonable rates for your state, and strong customer service. Avoid lenders with excessive fees or negative borrower reviews. Comparison shopping is advisable before choosing where to apply.
Can I renew or extend my short term loan if I can’t repay by the due date?
Some lenders may allow renewals or extensions but this is not advisable. Renewing short term loans leads to a cycle of growing fees and interest, and can trap borrowers in debt. Take care to only borrow what you can realistically repay on schedule.
What happens if I default on a short term loan?
Consequences for non-payment may include aggressive debt collection practices, being sent to collections agencies, wage garnishment, civil lawsuits, and significant damage to your credit score and history. Be sure you can make the required payments before accepting a short term loan.