Short-term Loans: Low Rates, No Prepayment Penalties
Are you in a financial bind, needing quick access to cash? If you have less-than-perfect credit or don’t want a long-term commitment, traditional loan options may not work for you. That’s where short-term loans come in.
Short-term loans may be able to get you the extra money you need fast. Plus, there are several options to suit a variety of situations, whether you have bad credit, no credit, or excellent credit.
To help you decide if you should get a short-term loan or not, here’s a complete guide. Learn:
- What are short-term loans?
- How do short-term loans work?
- The types of short term loans
- Interest rates on short-term loans
- The pros and cons of short term loans
- Where to find a short-term loan
What are short-term loans?
Short-term loans are loans with shorter repayment periods than traditional loans, typically 12 months or less. They are designed to cover surprise expenses like a broken windshield, an expensive visit to the dentist, or a broken water heater.
Short-term loan amounts are typically less than what traditional loans offer but vary depending on the type you get. Further, interest rates and fees tend to be higher on certain types of short-term loans.
How a short-term personal loan works
You can apply for short-term loans online or in-person at a local bank, credit union, or loan company. The right loan type for you will depend on a few factors such as how much money you need, how long it will take you to repay it, your credit, and your assets. We’ll explain more about the different types of short-term loans below.
After applying, the lender will decide if it will approve your loan. If it does, you will need to review the rates and terms of the loan to ensure you agee. If you agree, you will typically get your loan within a couple of business days—if not the same day. Then, you will begin making repayments according to your contract until the debt is repaid in full.
Types of short-term personal loans
Now, let’s take a look at the different types of short-term loans you can get to cover your personal expenses.
Payday loans are small-dollar loans, typically $500 or less, that are usually due within two to four weeks on your next payday, hence the name. You can often get this loan type even if you have bad credit, as many brick-and-mortar lenders don’t check your credit. Instead, they base the loan approval on a recent paystub.
Online payday lenders are still flexible but do often check your credit. The downside is, payday loans often come at a high cost. Some have APRs as high as 400%, so they’re only recommended if you can’t qualify for other types of financing.
Collateral loans, also known as secured loans, are backed by an asset like your car title or other personal property. When it comes to short-term loans, you’ll most often see collateral loans from pawnshops and auto title lenders.
Pawnshops enable you to provide an item of worth in exchange for a loan. Then, if you don’t pay off your loan, they keep your item. If you own your car in full, auto title loans lend you a percentage of your vehicle’s worth. However, if you fail to repay it plus interest and fees by the due date, you could forfeit your car.
Collateral loans may be easier to qualify for and have lower rates than unsecured loans. But if you default, your lender can take the asset you used to guarantee the loan, so make sure you can pay on time if you go this route.
Personal lines of credit
Unsecured personal lines of credit are similar to credit cards. You’ll be approved for a certain loan amount that you can draw from as needed, so long as you don’t go over the limit. You won’t be charged interest on any money that you don’t use, which makes lines of credit ideal if you don’t know how much money you need to borrow. However, you’ll need decent credit to get approved.
Emergency cash loans
Emergency personal loans can help you cover unexpected expenses like car repairs or vet bills. They’re usually unsecured and have fast funding times to get you the money you need quickly.
Upon approval, the loan amount is disbursed as a lump sum. Interest rates are typically fixed and terms often range from a few months up to a year or more.
The downside is you will typically need decent credit to qualify. Further, you’ll need good to excellent credit to get attractive rates and terms.
How much interest will you pay on short-term loans?
The average interest rate for 24-month personal loans is 9.50%, while auto title loans average 300% APR and payday loans average 400% APR. Interest rates on short-term loans can fall anywhere in between. If you apply with a lender that checks your credit, your score and history will play a factor in the interest rate you get. Better scores mean lower rates and fees.
Here’s a closer look at how interest rates may affect you depending on your borrowing situation.
When shopping online for a 12-month $1,000 personal loan for debt consolidation, assuming a fair credit score between 640 and 699, APRs range from 6.49% to 34.99%.
You may be able to get a lower interest rate and save money by consolidating your debt with a short-term loan, especially if you have credit card debt. The average interest rate for credit cards is 14.52%.
Having a single monthly bill instead of several can also streamline your finances and prevent you from missing payments.
When shopping online for a 12-month $1,000 personal loan for home improvement, assuming a fair credit score between 640 and 699, APRs also range from 6.49% to 34.99%.
If you need money for an emergency home improvement project, a short-term personal loan can be a good choice. You’ll get the funds you need quickly without having to put your home up as collateral.
But because short-term loans are usually unsecured, they may have higher interest rates than secured financing options like home equity lines of credit, which is something to keep in mind.
Business and career development
Short-term loans can help you cover gaps in cash flow, purchase inventory, and grow your business. Business and personal loans usually have similar interest rates, but personal loans may be easier to qualify for if your company doesn’t have much credit history.
You can also use short-term loans to pay for certifications that will advance your career. Although personal loans usually have higher rates than student loans, they offer more flexibility in the types of courses you’re allowed to take, so they may be a better choice for career development.
Pros of short-term loans
Here are some of the main benefits of short-term loans to help you decide if they’re right for your situation.
Most lenders have online applications that only take a few minutes to complete, and you could get approved as soon as the next business day.
Paying less interest
Because there’s less time for interest to accrue, your total borrowing costs may be less for a short-term loan than a long-term loan with a lower interest rate.
Improve credit rating
Paying your loan on time may boost your credit score, showing future lenders that you can manage debt responsibly. Ask your lender if they report accounts to the credit bureaus.
Personal loans can be used for any purpose from car repairs to moving costs. They usually have flexible terms too, allowing you to choose a payment plan that works for you.
Cons of short-term loans
On the downside, short-term loans can have higher rates than long-term loans, which is something to keep in mind. They may also have origination and late payment fees, so make sure to factor them in when you’re figuring out how much your loan will cost you.
If you don’t have enough money to pay back your loan, there’s also a risk that you could default or get caught in a debt cycle. Often, if you can’t repay your loan, you may be offered an extension with more fees. This can be a slippery slope. But when used responsibly, short-term loans can be a good way to cover personal or business expenses that you can’t pay for with your savings.
Short-term personal loans and your credit
Applying for a loan can cause a small, temporary drop in your credit score if a lender performs a hard check on your credit report. However, payment history is the biggest factor that influences your credit score so if you repay your loan according to schedule, and your lender reports your account to the credit bureaus, your credit score will likely get a boost. If you don’t have any installment accounts, getting a short-term loan could also improve your credit mix, which makes up 10% of your FICO score.
On the other hand, if you miss payments, it could have a negative effect on your credit. Once payment is 30 days late, your lender may report it which could cause your score to drop by several dozen points. So if you can’t make your scheduled payment, it’s best to get in contact with your lender right away.
Where to find short-term loans
Most banks and credit unions offer short-term personal loans. But if you want to get your funds quickly, online lenders are worth considering. They usually have faster application processes and funding times than traditional banks. Plus, you can easily comparison shop between online lenders to find the best deal.
The right short-term loan will depend on your personal situation but the good news is, there’s a solution for just about everyone. From payday and auto title loans to credit lines and emergency loans, you’re sure to get the cash you need fast to take care of your expense, pay it back, and move on.