Short-term loans are one of the most convenient borrowing options when things go wrong. Even if you meticulously prepare your budget each month, keep in mind that anything may happen, and even a well-structured budget may not be able to handle unforeseen spending. When these costs arise, consumers seek financial aid from lending institutions. However, the borrowers cannot access all lending forms because of high criteria, and short-term loans remain the most common borrowing type while in a financial crunch.
Short-Term Loans Explained
A short-term loan is a loan that is used to meet sudden financial demands that may arise in the middle of the month while your next paycheck is still several weeks away. These loans, as the name implies, offer shorter payback durations. In addition, because the loan amounts are tiny, the lenders have relaxed the qualifying restrictions, making the loan application procedure straightforward.
Can I Get a Short-Term Loan with a Bad Credit Score?
A credit score is a digital record of how you utilize and repay your loan. A higher credit rating makes it easier for borrowers to secure a loan, while a lower credit score might negatively impact your borrowing options.
It’s common to have bad credit marks in credit reports. According to FICO (the Fair Isaac Corporation), one person in 10 has a bad credit score in the United States, not to mention that many borrowers have accounts with the collection agency.
Though bad credit is not permanent and the negative marks in your report as late payments, foreclosures, or even a bankruptcy can drop off your credit report after seven to ten years. Nevertheless, here comes a question: What can people with bad credit scores do when facing an emergency, if the lending options are restricted for them?
Fortunately, there is a handy solution to combat emergencies - they can take advantage of short-term online loans. But, unfortunately, the very fact that online lenders also provide short-term loans doubles your chances of getting a small loan regardless of your credit score, as online lenders do not carry out hard credit inquiries. Mostly, a bank account and proof of steady income are generally all that are required of a borrower.
Short-term Loan Types
A small short-term loan might help you bridge a financial gap in your budget or cover a minor emergency, such as a car repair, visiting a dentist, financing a little business project, or even buying presents for an unanticipated invitation to a birthday or wedding party. However, despite the loan’s urgency, the borrowers should check their financing options, compare the rates, examine the pros and cons, and take out a loan only after that. Here we have listed four types of short-term loans to help our borrowers to make better deals.
Trade Credit
Trade credit is undoubtedly the most basic and essential type of short-term financing for firms. The basic definition of trade credit is the agreement to acquire goods and services on credit and pay the provider later rather than upfront. Firms that employ trade credits will often give purchasers 30, 60, or 90 days to pay, with the transaction confirmed by an invoice. The primary benefit of trade credit is that it allows buyers to boost their cash flow while encouraging sellers to expand their sales. However, buyers should be cautious about making on-time payments; otherwise, they may be charged additional fees, which may be pretty costly and negatively influence the buyer's credit record.
Payday Loans
Payday loans are the most prevalent sort of short-term lending. When faced with a scarcity of finances, these small-amount loan instruments (often ranging from $100 to $2500) may prove to be helpful. These financial products are mostly made available by internet lenders who don't run a hard credit check. More often than not, the whole process of seeking and obtaining a payday loan may be completed from the comfort of your own home. The increased popularity of these loans may also be attributed to their ease of access to persons with all types of credit. So that if you need quick cash, you can submit a payday loan request and get your funds directly deposited into your bank account shortly. Despite being loaned for short periods, these loans feature higher interest rates, generally no more than a few weeks.
Bank Overdraft
A bank overdraft is a form of loan that allows you to cover a transaction or withdraw funds from your checking account even if your account has reached zero. For example, if you have no money in your account and spend $60, your balance will be -$60. This negative sign indicates that you have an overdraft. However, keep in mind that the overdraft is not interest-free, and you must pay overdraft costs that may exceed $30 per overdraft. Though an overdraft may help you avoid embarrassment, be aware that the potential repercussions of failing to make payments on these loan instruments may be unfavorable. Overdrafts are not only associated with increased interest rates and costs, but they may also have a negative influence on your credit score. In addition, if you do not pay your overdraft on time, you may increase your debt load.
Online Installment Loans
Online installment loans are another type of short-term loan. Borrowers can acquire a small amount of money fast using this loan kind. Installment loans, like payday loans, may be arranged online but have regular monthly installments, unlike the latter. Unlike payday loans, installment loans have modest interest rates. Online installment loan providers may also have minimal qualifying requirements for granting a loan request and, as a result, may be offered to persons with poor to no credit. Like other types of short-term loans, installment ones also provide flexibility to the borrowers. Remember that, while many of these features may be beneficial to you, failure to fulfill the payback dates may result in many issues.
The Primary Distinctions Between Short & Long-Term Loans
Short-term and long-term loans may relate to the length of time it takes to pay off the loan. Short-term loans are typically paid within a few weeks or months and even a year. At the same time, the repayment terms for the long-term loans may extend to many years. We have listed the main differences between these two loan types to help the borrowers to make informed loan decisions.
Eligibility Criteria
It is much easier for the borrowers to qualify for short-term loans as the eligibility requirements are rather low. In contrast, long-term loans have always been available exclusively to the best-qualified borrowers. As the lenders incur a higher risk of non-payment when making a long-term loan, they should be wholly convinced that they are working with responsible borrowers who can pay the loan in full without any defaults. Long-term loan customers have mainly established businesses with several years of profitability backed by the owner’s perfect credit score. This limited availability gave birth to alternative lending. These lending platforms strive to make loans available for people who were turned down from long-term bank loans.
There are no clear-cut requirements for qualifying for short-term loans as it’s primarily up to the lender whether or not to approve your loan request. However, US residency, a bank account, and evidence of a consistent source of income, such as a job or other reliable source, are usually among the few requirements for approving a loan request.
Loan Amounts
The loan amount is the next significant difference when comparing long and short-term loans. It goes without saying that the higher the borrowed sum, the longer it will take to repay it. Thus, short-term loans are not the right pick for you if you need higher amounts, as the latter’s amounts range primarily from $100 to $2500. Again, be informed that this range of parts varies from state to state, as in many forms, the maximum amount for getting short-term loans is set by the governing laws.
Loan Costs
In the case of short-term loans, the absence of complex criteria for identifying risky borrowers results in higher interest rates, as the lenders should protect themselves in the case of credit defaults. The additional cost ensures that short-term lenders profit on their loans even if the borrower defaults.
The high-interest rates can also be attributed to speed. Short-term loans are often handled within one business day. In contrast, long-term loans take several days to analyze the borrower's creditworthiness, followed by another few days to lend you the money.
Collaterals
Any valued asset often secures long-term loans. Then, in the event of a credit default, the lender has the authority to seize and sell the secured asset to recoup the outstanding debt. Short-term loans, on the other hand, do not necessitate collateral. And you can acquire the loan even if you don't have anything valuable to put up as collateral. Thus, as you can see, short-term loans are risk-free sorts of borrowing.
Loan Request Procedures
Another reason why short-term loans are growing in popularity is the ease of the request process. These loans require minimum documentation and are typically processed online, giving the borrowers the flexibility in request time and place. Long-term loans, in contrast, require a long time for the customers to become borrowers. You should gather and present many necessary documents, and stand in long queues waiting for your turn to show you in a good light proving that “you don’t need a loan” to get the approval.
Co-Signers
Long-term loan companies sometimes demand applicants to have a co-signer. A co-signer is someone who, together with the borrower, bears full responsibility for debt repayment. Having a co-signer increases the lender's trust that the loan will be repaid since if the borrower defaults on the credit, the co-signer is obligated to repay the debt. Typically, a co-signer is a family member or close friend. Short-term loan lenders do not require Co-signers in order for the loan to be approved. The most significant advantage of not requiring a co-signer is that you will not jeopardize your relationships because life is unpredictable, and you never know what may happen.
The comparison of these two loan types may be well-illustrated by this table. Analyzing the differences mentioned above, we can display the pros and cons of both loan types:
The Advantages of Short & Long-Term Loans
The Disadvantages of Short & Long-Term Loans
Conclusion
To sum it up, no one can tell you if short-term or long-term loans are ideal for you. Short-term loans may be a smart alternative in cases where you need small amounts of cash as quickly as possible. However, before you take them out, you should weigh all the benefits and drawbacks and determine whether this or that loan kind is appropriate for your current financial condition. Finally, a good loan will get you out of many problems and not the opposite.
