If you need money quickly for an unexpected expense, such as a car repair or a medical bill, you may consider taking out a short-term loan. A short-term loan is a type of loan that you have to pay back in a short period of time, usually within a year or less. Short-term loans can be a convenient way to get cash fast, but they also come with high interest rates, fees, and risks. Here’s what you need to know about short-term loans before you apply.
What are short-term loans?
Short-term loans are loans that have repayment terms of 12 months or less. They are also known as payday loans, cash advances, or title loans, depending on the lender and the type of collateral involved. Short-term loans are typically unsecured, meaning you don’t have to put up any asset as a guarantee. However, some lenders may require you to give them access to your bank account, your paycheck, or your car title as a form of security.
Short-term loans are usually available from online lenders, payday lenders, or pawn shops. You can apply for a short-term loan online or in person, and you may get approved within minutes or hours. The loan amount can range from $100 to $10,000, depending on the lender and your income. The loan term can vary from a few days to a few months, depending on the lender and your repayment schedule.
How do short-term loans work?
When you take out a short-term loan, you agree to pay back the loan amount plus interest and fees by a certain date. The interest rate is usually expressed as a fee per $100 borrowed, such as $15 or $20. The annual percentage rate (APR), which is the total cost of borrowing expressed as a yearly rate, can be very high, ranging from 300% to 1,000% or more.
The repayment method can vary depending on the type of short-term loan you choose. For example, if you take out a payday loan, you may have to write a postdated check or authorize an electronic withdrawal from your bank account for the full amount due on your next payday. If you take out a title loan, you may have to hand over your car title to the lender until you pay off the loan. If you fail to repay the loan on time, the lender may charge you late fees, rollover fees, or collection fees. The lender may also repossess your car, sue you, or report you to credit bureaus.
What are the benefits of short-term loans?
Short-term loans can have some benefits, such as:
- Easy and fast application process: You can apply for a short-term loan online or in person, and you may get approved within minutes or hours. You may also get the money in your bank account or in cash on the same day or the next business day.
- Few eligibility requirements: You don’t need a good credit score or a long credit history to qualify for a short-term loan. You just need to be at least 18 years old, have a valid ID, have a regular source of income, and have an active bank account.
- Flexible use of funds: You can use a short-term loan for any purpose, such as paying for an emergency, covering a cash shortfall, or consolidating other debts.
What are the drawbacks of short-term loans?
Short-term loans can also have some drawbacks, such as:
- High interest rates and fees: Short-term loans can be very expensive, as they charge high interest rates and fees that can add up quickly. You may end up paying more in interest and fees than the original loan amount.
- Short repayment period: Short-term loans can be hard to repay on time, as they have short repayment periods that may not align with your cash flow. If you miss a payment or extend the loan, you may incur additional fees and interest that can increase your debt.
- Risk of debt trap: Short-term loans can lead to a cycle of debt, as you may have to take out another loan to pay off the previous one or to cover other expenses. This can damage your credit score, increase your financial stress, and make it harder to get out of debt.
How to choose the best short-term loan for you?
If you decide to apply for a short-term loan, you should compare different lenders and options to find the best one for you. Here are some factors to consider:
- Interest rate and fees: The interest rate and fees are the most important factors, as they determine how much you pay for the loan. You should look for the lowest APR possible, and avoid any hidden or extra fees, such as origination fees, prepayment penalties, or late fees.
- Loan amount and term: The loan amount and term are the amount of money you borrow and the length of time you have to repay it. You should only borrow what you need and what you can afford to repay, and choose a term that fits your budget and goals.
- Repayment method and flexibility: The repayment method and flexibility are how you pay back the loan and how much leeway you have in case of financial difficulties. You should choose a repayment method that is convenient and secure, and look for a lender that offers grace periods, extensions, or hardship programs if you need them.
- Customer service and reputation: The customer service and reputation are the quality of the lender’s support and feedback from other borrowers. You should look for a lender that has positive reviews, responsive service, and transparent policies.
Where to get a short-term loan?
There are many lenders that offer short-term loans, such as online lenders, payday lenders, or pawn shops. You can use online tools, such as Credit Karma or Forbes, to compare different lenders and options. You can also check your prequalified rates with multiple lenders without affecting your credit score.
Before you apply for a short-term loan, you should check your credit score and report, and improve them if possible. You should also calculate your income and expenses, and make a budget and a plan to pay off your loan. A short-term loan can be a helpful tool to get cash fast, but only if you use it wisely and responsibly.