Interest rates on short term loans fully explained

interest rates on short term loans

Rates on short-term loans vary depending on the lender you work with. Online lenders offer all types of loan amounts and terms. 

Personal loans are a popular short-term option because they can be used for almost any expense, such as a car repair. According to AAA, common car repairs can run consumers $500 to $600 a visit and sometimes “much higher.”1 But personal loans allow borrowers to conveniently pay off a large cost over several months or years. 

Keep reading to learn more about personal loan rates and how to qualify with online lenders. 

Are the Interest Rates Lower With Short-Term Loans?

It’s a misconception that short-term loans have lower interest rates than long-term loans. Although the repayment length is shorter with short-term loans, interest rates may be higher!

Financial institutions make money by charging interest fees on loans. A long-term loan benefits the lender because they earn a lot more interest over an extended period. In contrast, short-term loans limit how much interest a lender receives. Many financial institutions typically charge higher rates to compensate for a shortened repayment length.

However, repayment strategies are available if you want to save money on interest charges. You can still benefit significantly from borrowing money through a short-term loan!  

What Fees Do Short-Term Loans Have?  

Interest is not the only cost associated with installment loans. If you want to apply for a short-term loan, it’s critical to know about the different fees you may have to pay.

  • Application Fee — An application fee is a charge for applying with the lender. Many lenders do not charge application fees, but those that do are generally upfront about the charge. This fee is typically nonrefundable, so if you do not qualify, you do not get your money back.
  • Origination Fee — An origination fee is a one-time cost that lenders charge for processing your application. Your origination fee will be visible on your loan offer if you qualify with a lender. The origination fee is generally a percentage of your total loan amount, but it can also be a flat fee.  
  • Late Fee — A late fee is a charge for paying your loan late. Late fees can increase if the borrower continuously makes late monthly payments. And your credit score may also decrease if a payment is more than 30 days late. 
  • Prepayment Fee — A prepayment penalty fee is a charge for repaying the loan early. The prepayment fee is generally a percentage of the remaining loan balance. Most lenders do not charge prepayment fees, but if you want to pay early to save on interest, ensure that your lender does not charge this type of fee. 

How Much Money Can I Get With Short-Term Loans?

Short-term loans typically offer smaller loan amounts than long-term loans. However, eligible borrowers may still be able to obtain a significant amount of money! 

Loan amounts for personal loans usually range from a hundred dollars to a few thousand. A short-term loan is highly versatile. You can use a personal loan if you need 100 dollars now for groceries or a few thousand to pay off a Chapter 13 early. But before you start looking for a lender, consider how much money you need because the maximum loan amount varies per lender. 

Your credit history and income will also affect how much you qualify to receive through a personal loan. For example, obtaining the maximum loan amount may be difficult if your credit rating is low due to a late car payment

Do I Need a Good Credit Score to Get Short-Term Loans?

You do not need a perfect credit score to qualify for a short-term loan! Although eligibility depends mainly on your credit score and income, know that many lenders offer flexible requirements so more people can access fast emergency cash. 

When a borrower applies for a loan, the lender will review their credit rating. Most financial institutions use the FICO Score, which ranges from 300 to 850 points. Your credit rating depends on where your score falls within five distinct numerical categories, as shown below.    

  • Poor — 300-579
  • Fair — 580-669
  • Good — 670-739
  • Very Good — 740-799
  • Excellent — 800-850

According to FICO, the average credit score is now 718.2 Although an excellent credit score is ideal, many lenders qualify borrowers with a ‘good’ credit rating. If you have a poor or fair rating, rest easy knowing loan options are still available! The minimum credit score requirement varies per lender, so inquire with multiple financial institutions to find the best loan offer for you.  

Know that bad credit loans and no credit check loans are legitimate options for borrowers with lower credit scores. However, these loans can have higher interest rates, so it’s critical to compare lenders. 

What Are Common Short-Term Loan Options?

There are various short-term loan options to choose from when you need emergency money now. The best borrowing choice depends on how much cash you need and when you want to pay off the loan. Read about some standard short-term loans below!

Payday Loans

Payday loans, also known as paycheck advances and cash advances, provide emergency cash to people waiting for their next paycheck. Most borrowers are able to get a few hundred dollars. The repayment length is typically two weeks, although some lenders provide a 3-month payday loan option. Many people apply for payday loans because credit is not one of the main qualifying factors, unlike other loan options. It’s possible to qualify for a payday loan with bad credit if you have access to a reliable source of income. 

But while payday loans seem convenient, they are anything but. Many borrowers actually end up struggling financially due to the short repayment period and high interest rates. Since the repayment period is so short, lenders enforce sky-high interest rates to make more money and mitigate risk. If you need money, seriously consider whether you can repay the loan on time. 

Pawn Shop Loans

A pawn shop loan is a secured option for borrowers who need money quickly. To qualify for a pawn shop loan, you typically only need a reliable income source and an asset. The amount of money you can get through pawn shop loans depends on the type of collateral you use. 

Pawn shop loans generally accept various items as collateral, such as jewelry, vehicle titles, collectibles, electronics, etc. The pawnbroker will provide a small percentage of the market value, and you will have to repay the loan in full by the due date. Although you can get money quickly, there are risks with pawn shop loans. The interest rates can be very high. You risk losing your assets if you experience financial issues during the repayment process. 

Personal Loans

A personal loan is a short-term option that is repaid through monthly installments. Banks, credit unions, and online lenders all offer personal loans. Qualification for a personal loan depends on your credit score and income. However, many lenders maintain a reasonable minimum credit score requirement. If you have a low credit score, consider applying for bad credit personal loans! A bad credit loan functions just like a traditional personal loan, but it’s usually more flexible than strict. 

The repayment length of a personal loan can last months or a couple of years! The amount you can get through personal loans varies from a few hundred dollars up to a couple thousand. However, your credit will ultimately determine how much you obtain with a personal loan. Your credit also affects the interest rate, as higher scores typically get lower rates.

What Information Is Required for a Short-Term Loan?

To get approved for a personal loan, you need to provide a few critical pieces of information. Every lender requires different types of paperwork. However, these are the general documents you may have to provide: 

Proof of Identification

The lender may ask you to show a government-issued photo ID as proof of your identity. Most borrowers decide to use a driver’s license, state identification card, or U.S. passport. In addition, you will have to provide your Social Security Number (SSN) so the lender can run a credit check. If you do not have an SSN, ask if the lender accepts an Individual Taxpayer Identification Number (ITIN). 

Proof of Residence 

Proof of residence is required to confirm your identity and personal loan eligibility. The financial institution will ask you to provide a formal document with your full legal name and address. 

For example, you can usually provide one of the following documents: 

  • Mortgage statements
  • Lease agreement
  • Utility bills
  • Insurance statements
  • Credit card statement 

Proof of Income

Your income is one of the main qualifying factors for short-term loans, so the lender will need confirmation of your wages. As proof of employment, most borrowers provide paycheck stubs. However, many lenders accept alternative documents because some borrowers receive irregular income. Instead of paychecks, you could use tax returns, bank statements, government award letters, invoices, etc. Remember that you may still qualify for loans with a low credit score if your income is sufficient.

Bank Account Details

Many financial institutions require eligible borrowers to have an active bank account since money is typically deposited electronically. You need to provide your account and routing number to get your loan money via direct deposit. 

How Does a Short-Term Loan Affect My Credit?

Short-term loans will inevitably affect your credit score. While your credit score may drop by a few points when you submit a loan application, it can continue to be affected throughout the repayment process when the lender sends reports to the major credit bureaus. 

Take a look at how different repayment scenarios can impact your credit score below. 

Repayment ScenarioDescriptionImpact on Credit Score
On-Time PaymentsMaking all loan payments on time as per the agreed schedule.Positive impact. Consistent on-time payments improve credit history.
Late PaymentsPayments made past the due date. The impact varies based on how late the payment is.Negative impact. Late payments can significantly lower the score, especially if over 30 days late.
Very Late Payments (30+ days)Payments that are more than 30 days late. These are often reported to credit bureaus.Severe negative impact. Can lead to major drops in credit score and remain on the credit report for up to 7 years.
Partial PaymentsMaking payments that are less than the minimum required amount.Negative impact. Partial payments may be marked as missed payments.
Loan PayoffRepaying the entire loan amount before the end of the loan term.Generally positive. Reduces debt-to-income ratio, but can cause a slight dip initially due to closure of an account.
Defaulting on the LoanFailing to repay the loan as per the agreement, leading to a default status.Severe negative impact. Defaulting on a loan is one of the most damaging events for a credit score.

FAQs About Rates on Short-Term Loans

How does my credit score affect the interest rate on a short-term personal loan?

Your credit score plays a crucial role in determining the interest rate you’ll receive on a personal loan. Generally, a higher credit score can lead to lower interest rates, as it indicates to lenders that you’re a lower-risk borrower.

Can I find competitive interest rates for short-term loans from online lenders?

Absolutely! Online lenders often offer competitive interest rates for short-term loans. They might provide more flexible terms compared to traditional banks, especially if you have a good credit history.

Are rates on short-term personal loans from credit unions different?

Yes, credit unions can offer lower interest rates on personal loans compared to other lenders. Since credit unions are member-owned, they often have more favorable terms, including lower fees and interest rates.

How can I reduce the cost of an origination fee on a short-term loan?

You can reduce the cost of an origination fee by shopping around with multiple lenders. Comparing the cost of the origination fee can help you save money. You can also negotiate with the lender to get a lower origination fee. Remember that building a good credit score can help you get lower fees and better rates. 

How important is my debt-to-income ratio when applying for California finance lender loans?

Your debt-to-income ratio is very important, especially for California Finance Lender loans. Lenders use this ratio to assess your ability to manage monthly payments and repay the loan, which can influence your interest rate and loan approval.

Will taking a short-term loan for debt consolidation affect my interest rate?

Using a short-term loan for debt consolidation can be a smart move, but the interest rate will depend on your credit score and other financial factors. Debt consolidation loans can help streamline your payments and potentially reduce your overall interest rate.

Does a longer credit history lead to better rates on short-term loans?

Typically, yes. A longer and positive credit history can demonstrate to lenders that you’re a responsible borrower, potentially leading to better interest rates on your short-term loan.

How does borrowing from an equal housing lender affect my options for short-term loans?

Choosing to borrow from an Equal Housing Lender ensures that you receive fair and equal treatment when applying for short-term loans. As Equal Housing Lenders, these institutions are committed to providing lending opportunities without discrimination. This means you can expect a consistent and unbiased approach to your loan application.

The Bottom Line on Short-Term Loan Rates From CreditNinja

The interest rates for a short-term personal loan can be higher than for long-term loans. Lenders make money through interest fees, and short repayment terms can affect their bottom line. But by taking the time to inquire with multiple lenders, you can find one that offers affordable interest rates for almost any credit score! 

CreditNinja provides personal loans with competitive interest rates and flexible repayment plans. But we also offer financial articles on various topics. If you want to increase your financial literacy, check out our online blog to learn why your tax return is taking so long, how to finance a phone with bad credit, and much more!


  1. Car repair costs are up almost 20% over the past year | CNBC
  2. The Average Credit Score Just Reached an All-Time High | NASDAQ
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