A short-term loan can be an excellent option for those who need money quickly and don’t want to go through the hassle of a long application process. However, it’s important to understand all of the details before deciding if this type of loan is right for you.
In this guide, we will cover everything you need to know about short-term loans: what they are, how they work, the benefits and drawbacks, and more! By the end of this article, you will clearly understand whether or not a short-term loan is right for you.
What is a Short-term Loan?
A short-term loan is a type of loan that is typically repaid within a year. These loans are usually smaller in amount than traditional loans, making them more manageable for those who need quick access to cash. Short-term loans can come in handy for various purposes, such as unexpected medical bills, home repairs, or car repairs.
What’s more, short-term loans usually have shorter and simpler application processes than traditional loans, making them a good option for those who need money fast. However, it’s important to remember that short-term loans often come with higher interest rates than other types of loans, so be sure to shop around and compare rates before you decide on a loan.
How does a Short-term loan work?
Short-term loans are typically repaid in instalments, meaning you’ll make regular payments on the loan until it’s paid off. These payments will usually be made on a monthly basis, and they will typically be due around the same time each month. The exception to this is bridging loans, which usually require repayment of interest in one lump sum at the end of the loan term.
It’s important to note that because short-term loans have shorter repayment periods than traditional loans, the monthly payments will usually be higher. This is something to keep in mind when you’re budgeting for your loan repayments.
Typically, you’re going to want to use short-term loans to pay for things like unexpected medical bills or car repairs. These are typically one-time expenses that you can’t afford to pay all at once but that you can budget for over the course of a few months.
What are the different types of Short-term loan?
There are two main types of short-term loans: unsecured and secured. Unsecured loans are not backed by any collateral, which means they’re riskier for lenders and usually come with higher interest rates. On the other hand, secured loans are backed by collateral (usually a property or a car), which makes them less risky for lenders and often comes with lower interest rates.
The type of loan you choose will depend on your needs and financial situation. If you need a large amount of money quickly and you have good credit, an unsecured loan may be the best option for you. However, if you need a smaller amount of money and you’re willing to put up some collateral, a secured loan may be a better option.
However, there are a few other types to consider, so here’s the full list;
- Secured Loan – A secured loan is one that’s backed by collateral, which the lender can take if you default on the loan. The most common type of secured loan is a mortgage, but car loans and title loans are also considered secured loans. Depending on the type of secured loan, your term may be longer term.
- Unsecured Loan – An unsecured loan is one that’s not backed by collateral. The most common type of unsecured loan is a credit card, but personal loans and student loans are also considered unsecured loans.
- Fixed-rate Loan – A fixed-rate loan is one where the interest rate stays the same for the life of the loan. The most common type of fixed-rate loan is a mortgage, but auto loans and student loans can also have fixed interest rates.
- Variable-rate Loan – A variable-rate loan is one where the interest rate can change over time. The most common type of variable-rate loan is a credit card, but some personal loans and student loans can also have variable interest rates.
- Bridging Loans – Bridging loans are short-term loans that are used to “bridge the gap” between two other financial products. For example, you might take out a bridging loan to help you buy a new house before your old one sells.
- Merchant Cash Advances – A merchant cash advance is a type of loan that’s typically used by businesses. The lender gives the business a lump sum of cash, and the business repays the loan with a percentage of their future credit card sales.
- Payday Loans – A payday loan is a type of short-term loan that’s typically used by people who are in between paychecks. The loan is due on the borrower’s next payday, and the borrower repays the loan with their next paycheck.
What are the advantages of Short-term Loans?
There are a few advantages to taking out a short-term loan, and these are important to know because they’ll help you understand whether or not this loan type is right for you.
- High Level of Acceptance – Short-term loans are typically easier to qualify for than traditional loans because they have shorter repayment periods. This means that lenders are willing to take on more risk when it comes to approving you for a loan.
- You Get the Money Fast – Another advantage of short-term loans is that you can get the money fast. In most cases, you’ll be able to get your loan funds within 24 hours of applying for a loan.
- You Can Use it for Anything – Unlike some other types of loans, short-term loans can be used for anything. There are no restrictions on how you use the loan funds, so you can use them for anything from medical bills to car repairs to home improvements.
- Flexible Usage – Second, short-term loans can be used for a variety of purposes. You can use them to pay for unexpected expenses, consolidate debt, or even finance a large purchase.
- Lower Borrowing Costs – Because short-term loans are paid back quickly, even though they tend to have higher interest rates than other types of loans, you’ll tend to pay less over the long term if you can keep up with your payments and can pay it off quickly.
What are the disadvantages of Short-Term Loans?
Of course, there are also a few disadvantages to taking out a short-term loan that you should be aware of before deciding.
- Higher Interest Rates – The first disadvantage is that short-term loans typically have higher interest rates than traditional loans. This is because they’re repaid over a shorter period of time, so lenders charge higher interest rates to make up for the fact that they’ll be getting their money back sooner.
- Shorter Repayment Periods – Another disadvantage of short-term loans is that they have shorter repayment periods than traditional loans. You’ll need to repay the loan in full within a few months, which can be difficult if you’re not prepared for it. For example, if you have an unexpected bill come up and money gets tight, you may be left struggling.
- Potential Credit Score Damage – Lastly, if you miss a payment or are late on a payment, it can damage your credit score. This is because short-term loans are reported to the credit bureaus, and any late or missed payments will show up on your report. If you have a good credit score, this can be damaging.
Which financial institutions offer Short-term loans?
Now that you know all about short-term loans, it’s time to talk about where you can get one. There are a few different financial institutions that offer short-term loans, and each has its own benefits and drawbacks.
- Banks – The first option is banks. Banks typically have lower interest rates than other types of lenders, but they also tend to be more selective when it comes to approving loans. This means that it may be difficult to qualify for a loan if you don’t have good credit.
- Credit Unions – Credit unions are another option for taking out a short-term loan. Credit unions typically have higher interest rates than banks, but they’re also less selective when it comes to approving loans. This means that you’re more likely to be approved for a loan, even if you have bad credit.
- Online Lenders – The last option is online lenders. Online lenders are typically the most flexible when it comes to approving loans, but they also tend to have the highest interest rates. This means that you could pay a lot of money in interest if you’re not careful.
When choosing which provider is best for you, it’s best to compare interest rates, fees, and terms to see which one is the best fit. Make sure to read the fine print before you sign any loan agreement, so you know exactly what you’re getting into. For more, read our guide to the 9 major types of financial institution.
Who qualifies for a Short-term Loan?
Now that you know all about short-term loans, you probably wonder if you qualify for one. The good news is that most people do. Short-term loans are typically available to anyone who has a steady income and a bank account.
To qualify for a short-term loan, you’ll typically need to have a job or another source of income, such as Social Security or disability benefits. You’ll also need to have a bank account, so the lender can deposit the money into your account and so you can make your payments.
In the UK, the typical rules are that:
- You must be 18 years or older
- You must have a bank account
- You must have a steady income
If you meet these requirements, you should be able to qualify for a short-term loan.
Your credit rating or score will also be taken under consideration. This means that if you have bad credit, you may still be able to qualify for a loan, but the interest rate will likely be higher.
How much does a Short-term Loan cost?
The cost of a short-term loan will vary depending on the lender, the amount you borrow, and the length of time you need to borrow it for. In general, the longer you need to borrow the money, the higher the interest rate will be.
For example, let’s say you need to borrow £500 for two months. The interest rate might be 20%, which means you’ll owe £100 in interest when the loan is due. This works out to an annual percentage rate (APR) of 240%.
To compare different loans, it’s best to look at the APR rather than just the interest rate. The APR takes into account not only the interest rate but also any fees that are charged by the lender. This makes it a more accurate representation of the true cost of the loan.
When you’re comparing loans, make sure to look at the APR so you can compare apples to apples.
The average APR of a short-term loan in the UK is currently around 1000%. This means that if you borrow £500 for two months, you’ll owe £100 in interest, but this can change since interest rates change and deals can be offered, so make sure you’re doing your research to see what’s actually out there.
How can I apply for a Short-term Loan?
Now that you know everything there is to know about short-term loans, you’re probably wondering how to apply for one. The process is actually quite simple and can be done entirely online.
- To apply for a loan, you’ll need to fill out an application with your personal and financial information. Once you’ve submitted the application, the lender will review it and decide whether or not to approve your loan.
- If you’re approved, the money will be deposited into your bank account within a few days. You’ll then have a set period of time to repay the loan, typically two weeks to three months.
- When the time comes to repay the loan, the lender will automatically debit the amount owed from your bank account. If you don’t have enough money in your account to cover the payment, you may be charged fees by your bank.
It’s important to make sure you have the money in your account on the day your loan is due to avoid any extra fees.
To sum it all up, applying for a short-term loan is a simple process that can be done entirely online. Just make sure you have all the necessary information and that you understand the terms of the loan before you sign anything.
How can I calculate short term loan costs?
Now that you know everything there is to know about short-term loans, it’s time to learn how to calculate them. The process is actually quite simple and can be done entirely online.
To calculate short-term loan costs, you’ll need to fill out an application with your personal and financial information. Once you’ve submitted the application, the lender will review it and decide whether or not to approve your loan.
If you’re approved, the money will be deposited into your bank account within a few days. You’ll then have a set period of time to repay the loan, typically two weeks to three months.
Typically, the website, bank, or credit provider you’re taking the loan out with will tell you exactly how much you’re paying back and over what term, but you can always use a formula to figure it out yourself. This is important because it will help you to budget and to confirm the loan you’re taking out is affordable to you over the term of the loan.
The formula for working out interest (which is a ‘simple interest formula’) in the short term is as follows;
The formula for Simple Interest (SI) is “principal x rate of interest x time period divided by 100” or (P x Rx T/100).
P= Principal amount; R = Rate of interest per annum; T= No. of periods (in years)
For example, if you take a loan for £500 at 8% p.a. for six months (half a year being 0.5), you can calculate the interest like this;
Step 1: 500 x 8 x 0.5 = £2000
Step 2: Now divide that by 100. You get £20
So, the interest you’ll pay back is £20.
Do Short-term loans have lower interest rates?
No, short-term loans typically have higher interest rates than long-term loans. This is because they are considered to be a higher risk for lenders. Lenders charge higher interest rates to offset the risk of default.
When you’re comparing loans, make sure to look at the APR so you can compare apples to apples. The average APR of some types of short-term loan, such as payday loans in the UK is currently around 1000%. This means that if you borrow £500 for two months, you’ll owe £100 in interest. However, this can change since interest rates change and deals can be offered. So, make sure you’re doing your research to see what’s actually out there.
In short, applying for a short-term loan is a simple process that can be done entirely online. Just make sure you have all the necessary information and that you understand the terms of the loan before you sign anything.
And finally, remember to calculate your interest, so you know what you’re actually paying back. Short-term loans may have high-interest rates, but they can still be helpful in a pinch. Just make sure you know what you’re doing before taking one out.
Can you get a loan shorter than 30 years?
Yes, you can get a loan shorter than 30 years. In fact, most short-term loans are typically two weeks to three months. The loan terms will vary depending on the lender, but you can always negotiate for a shorter term if you need to.
Keep in mind that the shorter the term, the higher the interest rate will be. This is because lenders consider short-term loans to be a higher risk. So, if you’re considering a short-term loan, make sure you compare APRs, so you know what kind of interest rate you’re looking at.
What is the difference between a Short-term loan and a long term loan?
The main difference between a short-term loan and a long-term loan is the amount of time you have to repay the loan. Short-term loans are typically two weeks to three months, while long-term loans can be anywhere from one to 30 years.
However, there are many more differences than just the obvious term length difference. For example, the interest rates tend to be varied. This is because short-term loans are considered to be a higher risk by lenders, and, as such, the interest rates are typically higher.
Another difference is that short-term loans are typically unsecured, while long-term loans can be either secured or unsecured. This just means that short-term loans don’t require any collateral (like a house or car), but long-term loans might.
Also, the acceptance rates on both loans tend to vary. For example, short-term loans have a higher acceptance rate than long-term loans because they’re less risky for lenders. In short, there are quite a few differences between short-term and long-term loans. It’s important that you understand these before you decide which one is right for you, so make sure you’re doing your research to see what the best option is for you in your current circumstances or speak to a financial advisor who may be able to help.