What is a Short-Term Loan?
A short-term loan is a loan that is scheduled for repayment within 1 year. The timeline is not set in stone, and some lending companies view a period of fewer than 2 years as short term.
Short-term loans work the same as other term loans (medium and long), but with a short repayment period. A lump sum is given upfront and the borrower has to pay this sum back within the given time period. The only difference is the repayment period, which is usually within one year. Repayments are usually every week as opposed to every two weeks or once a month as with other loans. And the fees are higher than other types of loans paid over a longer time period. Short-term loans are a very simple investment product, with an upfront lump sum and a scheduled repayment period over the next year.
Short-term loans often charge higher rates than longer-term loans. But borrowers still end up paying less than what they would be paying with medium or long-term loans. And there can be stress associated with constantly paying off a 10, 20, or 30-year loan.
Short term loans can be processed within one day through reputable online lenders. For those with a less than excellent credit history who need money quickly, short-term loans are a good option. Lenders will often prefer cash flow than credit history when assessing a short-term loan application. But the rate of interest on the loan will certainly take into account the credit history, along with other criteria.
When is it Suitable to take a Short Term Loan?
It goes without saying that a short-term loan will carry higher interest than a long-term loan. Short-term loans are useful when there is an upfront cost such as equipment that needs to be bought quickly, but the cash is not there to pay the upfront fees. A short-term loan can help to purchase the equipment or other necessities needed by a business, so the daily cash flow is not interrupted.
Short-term loans have the benefit of foreseeability. When taking out a short-term loan, you are reasonably aware that you will be able to pay off the loan within a year. But 15 years into the future, it is impossible to genuinely assess how the finances of a company or individual will be doing.
It is only suitable to take a short-term loan when it is really needed and there are no other options available. The repayment cost is high and frequent, and the penalties for late payment can be severe. It is definitely one of the riskier types of loan options. Bad credit history and an urgent need for quick finance could be one situation where a short-term loan is a necessity.
But there are genuine scenarios where a short-term loan could be considered. For example, imagine a situation where you need to pay your suppliers within a week, but you have to fulfill a huge order for a client who can pay in 30 days. A short-term loan is definitely worth it in this scenario.
Pros and Cons of Short Term Loans
- Quick funding times.
- High chances of acceptance with low credit rating.
- Limited paperwork is required for the application process
- Quick processing of the application.
- One of the most expensive types of loans.
- Weekly payments can be difficult to meet for many companies with inconsistent revenue streams.