The risks of short-term loans


Short-term loans can be tempting if you need cash quickly. All you need to do is apply for a loan, get the funds you need and pay them back within a short period of time. These loans can save your life when trying to raise emergency funds for car repairs or medical bills without getting a loan from a bank.

However, short-term loans come with risks – high fees and interest rates, short repayment periods, potentially unscrupulous lenders – and should be approached with great caution.

Be pre-qualified

Answer a few questions to find out which personal loans you are prequalified for. The process is quick and easy, and it won’t affect your credit score.

What is a short term personal loan?

Short-term personal loans are loans made with little or no collateral that must be repaid in a year or less, sometimes weeks or months. Most simply require proof of employment with a certain monthly salary, a bank account, and a driver’s license or other ID. Because there is often no collateral and lower credit requirements, these loans charge a higher interest rate (up to 400%) and may incur other fees and penalties.

Many of these loans can be applied for and received quickly, and there are many providers to choose from. You simply submit your application (usually online) and proof of employment or other credit information, the company reviews it, you sign the contract, and you get your money back, often in as little as 24 hours.

Types of short-term personal loans

There are a range of types of short term loans, each with different characteristics, fee structures and terms. One of the most common is the payday loan, which provides money to borrowers while they wait for their next paycheck. Usually the only requirement is a pay stub to prove that you have a job. These loans often require quick repayment – as soon as your next paycheck is cashed – and many come with APRs and huge fees.

Another type of short-term loan, a car title loan, allows the borrower to use their vehicle as collateral as long as it is fully owned. These loans typically pay only a fraction of the car’s market value (usually up to half of its value) and can come with an APR of 300% and repayment periods as short as 30 days.

Bank overdrafts, where customers get temporary cover from their bank at a high interest rate when their accounts do not have the necessary funds, is also a form of short-term loan. As are installment loans, where borrowers make regular and frequent payments over a period of time until both principal and interest have been repaid.

Other options include lines of credit, which are extended by banks or credit unions to overcome temporary cash flow issues, and bridging loans, which can be useful in real estate transactions when a new home has been built. purchased while the other property is still in operation. the market.

Benefits of short term loans

Short term loans are easy to obtain and are attractive to those who do not have savings or a credit card in a financial emergency. Many can be requested and the money received via an online application. And they shell out the money quickly, often in just a few hours.

They are also suitable for those who have no collateral and may not have the necessary credit rating to get a traditional loan. Most simply require proof of employment, a bank account, and a driver’s license or other piece of identification.

Since the terms of these loans are so short, there is no long term commitment that usually comes with more traditional loans. You get your money, you pay it back, and you move on.

Disadvantages of short term loans

Lenders expect their money to be repaid quickly, certainly within a year, usually within a month or two weeks. You need to make sure you have a solid plan to pay it back within the loan limits as the consequences can cost you even more.

The interest rates on these loans are often very high. For just a few thousand dollars (most lenders won’t offer more than $ 10,000 or $ 15,000 at most) the borrower could be forced to pay an APR approaching 400% or more.

If you are unable to repay the principal on time, significant late fees start to accumulate. And that’s assuming the lender is honest. Some fancy outfits might attempt to extract even more drastic penalties.

These loans can also affect your credit score, both positively and negatively. Some companies do what’s called a serious credit investigation, and you get zapped for it. If you miss a payment or don’t pay off the loan on time, your credit will also be negatively affected.

Be pre-qualified

Answer a few questions to find out which personal loans you are prequalified for. The process is quick and easy, and it won’t affect your credit score.

The bottom line

While short term loans are convenient and seem like a great way to solve a temporary problem, they come with a lot of risks. Fees and interest rates can be as high as 400%, and repayment terms can be as short as two weeks. Missing payments will negatively affect your credit score and cost you more in late fees, penalties and interest. This can lead to a borrowing cycle that is difficult to break out of. Make sure you do your homework and research all of your options before applying for this type of loan.

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