What to know about short term loans

What to know about short-term loans

Before committing to any type of loan, including short-term loans, it’s important to research the various lenders, repayment terms, funding amounts, interest rates, and financial products available. Familiarizing yourself with loan types and their requirements will help guide you toward the right kind of funding best suited for your budget and financial situation.  

If you are looking for funds to make ends meet quickly, you may be looking into short-term loan options like payday loans, title loans, or even cash advance loans. Before you commit to these short-term lenders, learn about the products they offer and the potential risks you may encounter. You may find other more sustainable options that can better help you manage your expenses.

Key Takeaways

  • Short-term loans are typically low-amount loans with brief repayment terms.
  • Various types of short-term loans include payday loans, car title loans, cash advance mobile apps, and pawn shop loans.
  • Benefits of some short-term loans include a quick application process, fast funding, no requirement for collateral, and flexible credit score qualifications.
  • Potential risks of short-term loans include high interest rates, hidden fees, credit score penalties, and the risk of falling into a debt cycle.
  • Alternatives to short-term loans, such as a personal loan, getting cash from a credit card, and paycheck advances, may provide more favorable terms and conditions.

What Is a Short-Term Loan?

Short-term loans are a type of personal loan that typically comes with low loan amounts and brief repayment terms. Short-term loans are usually best suited for small expenses where the borrower can pay back their total balance in a few days or a few weeks at most. Borrowers can access short-term personal loans through financial institutions such as a bank, online lender, credit union, payday lender, or even a mobile app in some circumstances. 

Types of Short-Term Loans

These are the most common types of short-term personal loans available to consumers. 

  • Payday Loans: Unsecured loans with low amounts, a high-interest rate, and short repayment terms, typically around fourteen days. According to the United States Federal Trade Commission, interest rates for payday loans can get as high as 390%!1
  • Car Title Loans: Secured with low amounts and high-interest rates, backed by the borrower’s vehicle title.
  • Cash Advance Mobile Apps: Apps that provide early access to paychecks, with loan amounts deducted from the next paycheck.
  • Pawn Shop Loans: Loans where borrowers exchange property for cash, regaining ownership after full repayment. Defaulting may result in the sale of the property.

Are There Advantages?

What makes short-term loans so popular amongst people looking for fast cash? For many, a short-term personal loan provides benefits like: 

  • Quick loan applications: With a short-term loan online, borrowers can complete their initial application in just a few minutes or less and get a pre-approval status almost immediately. 
  • Fast Funding: Short-term personal loans offer quick access to funds, often deposited into the borrower’s account within hours or days of approval.
  • No Collateral: These loans are typically unsecured, meaning no property or land is required as collateral, providing relief to those without high-equity assets.
  • Flexible Credit Score Requirements: Concerned you may not have the credit score needed for a personal loan? Well, many short-term loans have no minimum credit score requirement, making them accessible to those with average or low credit. Lenders typically perform a soft credit check to confirm the borrower’s financial status.

Potential Risks of Short-Term Personal Loans

Although they do provide some benefits, like streamlined applications and a quick turnaround time, there are also many risks that can come with funding from short-term loan lenders. 

Before you submit your official loan request, make sure you are aware of all the potential risks and prepared to deal with them. 

High-Interest Rates and Hidden Fees

One of the biggest setbacks of most short-term personal loans is the high interest rates and hidden fees that are almost always associated with this type of funding. Since so many short-term loans are available to people with just about any credit score, lenders often offset the financial risk they are taking from lending to subprime borrowers by charging a higher interest rate. 

Other fees that many short-term lenders charge are: 

  • Prepayment Penalties: Prepayment fees are a penalty charge lenders impose on borrowers who try to pay off their loan early or make a payment before their designated due date. 
  • Balloon Payments: A balloon payment is a lump sum charge that some borrowers are responsible for at the end of their loan terms. Depending on the borrower’s budget, balloon payments may make it extremely difficult for some people to finish paying off their loans.

Possible Credit Score Penalties

Since many short-term loans have such high rates and can have hidden fees, applicants are often at risk of missing payments or having to make late payments. Unfortunately, making just one late payment on a loan can significantly affect your credit history in a negative way for up to seven years. 

Furthermore, you may also see a dip in your credit score due to short-term personal loans, depending on how many applications you fill out. Every time you submit a funding application, whether it be for a loan, line of credit, or other financial product, the lender will request a hard credit inquiry. Credit bureaus keep track of hard credit inquiries from loan applications and may penalize consumers who apply for many loans within a short period of time. 

Likelihood of Getting Sucked Into a Cycle of Debt

Along with dealing with potential late fees and credit score dips, borrowers are also at risk of getting sucked into a cycle of debt from their short-term loans. It’s not uncommon for borrowers to fall into a debt cycle due to too many loans. In fact, according to CNBC, personal loan balances have reached a record high of $192 billion across the United States.2 The interest rate and other fees charged by many short-term loan providers can make this type of funding quite expensive. Depending on loan amounts and rates, some borrowers may actually find that their minimum balance due is insufficient when it comes to lowering the total balance due on their personal loan. 

Alternatives to Risky Short-Term Loans

Thankfully, there are plenty of personal loan alternatives borrowers can turn to. 

Alternatives are commonly available with financial institutions like banks, direct lenders, online lenders, or a credit union. 

Some popular types of short-term personal loan alternatives borrowers may consider are: 

Loan TypeRequirements TermsPossible Funding Amounts Common UsesAdditional Information 
Unsecured Personal Loans– Credit check. – Proof of income. – Proof of residency. Varies (typically 1 to 7 years). $1,000-$50,000+.– Debt consolidation. – Home improvement. – Medical expenses. – No collateral required. – Interest rate can vary based on credit score. 
Credit Card / Your Credit Limit – Credit check. – Proof of income. Revolving credit. Varies, based on credit limit. – Everyday purchases. – Emergency expenses. – Online shopping. – Interest accrues on unpaid balances. – Potential for cash advances. 
Personal Line of Credit – Credit check. – Proof of income. – Proof of residency. Revolving credit. Varies, based on approved limits. – Emergency expenses. – Overdraft protection. – Home improvement. – Similar to a credit card but without the physical card. – Interest only on the amount drawn. 
Salary Advances– Employment verification. – Proof of regular salary. Short-term (usually until next payday). Up to 100% of one’s salary. – Emergency expenses. – Bill payments. – Typically offered by employers or third-party apps. – May have fees or interest. 
Home Equity Loans – Credit check. – Home appraisal. – Proof of income. – Proof of residency. 5 to 30 years. Up to 85% of home’s equity. – Home renovations. – Debt consolidation. – Major expenses. – Secured against the borrower’s home. – Failure to repay can result in foreclosure. 
Buy Now, Pay Later Loans – Credit check (sometimes).- Proof of income (sometimes). Short-term (weeks to months). Typically small (based on purchase). – Online shopping. – In-store purchases. – Allows deferred payments on purchases. – Potential interest and fees if not paid within the promotional period. 

What To Do Before Applying for a Loan

Although you may want to just go with the first loan offer you come across, you can make more informed financial decisions by taking a few steps before filling out a loan application. Take advantage of the tips below to help you make smart financial decisions when comparing lenders. 

Check Your Credit Report

The first thing you want to do when starting your search for a new loan is to check your most recent credit score and credit report. Make sure there are no errors on your report that may prevent you from being approved for funding. You can also use your most recent report to help guide you toward lenders or loan products that may work well with your current budget. 

Calculate Your Existing Debt

Do you have any other loans or financial obligations you are responsible for? Before you submit an additional loan application, take inventory of the debt you already have associated with your name. If you already have a significant amount of debt piled up, you may want to lower your balances a bit before acquiring another debt. You may even find that a debt consolidation loan would work best for your current situation. Depending on the lender and financial product you go with; you may end up with all your debt consolidated along with additional funding to take care of your most recent expense! 

Shop Around

While it can be tempting to go with the first decent offer you come across, try to research several lenders and financial products before filling out an application. You can compare lenders and loan products to make sure you are getting the very best possible deal. 

How To Compare Lenders 

When you shop around, ask lenders about the important factors of your potential loan. Below are some core elements of a loan you will want to gather more information about. 

  • Loan Terms: The loan term, also called the repayment period, determines how long it will take for a borrower to completely pay off their loan balance. Higher loan amounts typically allow borrowers more time to pay, while lower loan amounts commonly have much shorter repayment terms. 
  • Monthly Payment: Perhaps one of the most important factors of your loan is going to be the monthly payment. It’s crucial to make sure your new loan payments fit in with your existing budget and other financial obligations. If you want to pay off your loan faster, you may consider going with a higher monthly payment; just make sure to budget your repayment schedule accordingly. 
  • Annual Percentage Rate/APR: Your interest rate or annual percentage rate will play a major role in determining both how much your total loan will end up costing you as well as how long it will take you to pay off your balance. Usually, the higher your credit score is, the lower the interest rate you may qualify for. However, there are some lenders willing to offer special deals to subprime borrowers who can offer high-equity collateral to secure their loans. 
  • Qualification Requirements: Before you even start your loan application, make sure you are familiar with the lender’s basic qualification requirements. Most short-term lenders have basic approval requirements, but it is still a good idea to confirm you meet whatever standards they may have. 
  • Fees or Penalties: You will also want to ask your lender about any additional fees you may be charged, such as a loan origination fee. Origination fees are a common charge that comes with many types of loans at the time the borrower signs their loan contract. These fees are meant to compensate lenders for the underwriting process they go through when they draw up your loan contract. 
  • Application and Funding Turnaround Time: Lastly, ask your lender how long their funding process typically takes. You may decide to go with one lender over another after finding out one can offer you virtually the exact same loan details with a quicker turnaround time. 

Establish a Financial Plan

Think about how long you want to take to pay off your loan and what kind of monthly payments it will take to meet your goal. For higher loan amounts, you may want to prepare for a longer loan term. Lower loan amounts, on the other hand, may only take a few weeks or months to pay off. 

Gather Documents 

After you have researched your options and found a lender/loan product you think will be a good fit, it may then be a good idea to gather your loan documents. Most lenders are going to ask for similar core documents during the loan approval process, so gathering your documents beforehand may make your approval process go by even faster! Generally, the personal loan documents most lenders require are: 

  • Government-Issued Photo ID: To confirm your identity, lenders require proof of ID such as a driver’s license, passport, state-issued photo ID, etc. 
  • Bank Account Information: Some lenders will require your bank account and routing numbers so they can deliver your approved funds to your account via direct deposit. 
  • Verifiable Income: To make sure you have reasonable means to pay back your loan, lenders will ask for proof of income. You can prove income with documents like a paystub, certain bank statements, or tax return documents. 
  • Proof of Residency: Lenders need to confirm your address to ensure you are getting paired with appropriate loan amounts, terms, rates, etc. 

Short-Term Loans FAQs

What are the repayment terms for short-term loans?

The repayment terms for short-term loans can vary depending on the lender and the type of loan. Typically, these loans are expected to be paid back within a year, but some may require repayment within a few weeks. It’s essential to understand the repayment terms before taking out a short-term loan.

How much can I borrow with a short-term personal loan?

The amount you can borrow can vary greatly depending on the lender, your credit score, and your income. Some loans may offer as little as $100, while others may allow you to borrow thousands of dollars. Always borrow responsibly and only take out what you can afford to pay back.

What are some common uses?

A short-term personal loan is often used to cover unexpected expenses or to bridge the gap between paychecks. This can include things like car repairs, medical bills, or other unexpected costs. They can also be used for business expenses, travel, or educational costs.

What are the regulations?

Regulations can vary by state and by the type of loan. Some states have caps on interest rates or fees, while others may have specific rules about repayment terms or rollovers.  

How are short-term loans typically repaid?

These loans are typically repaid through scheduled payments over the term of the loan. This could be weekly, bi-weekly, or monthly, depending on the terms of the loan. Some lenders may also allow for early repayment without penalty.

Can short-term loans be used to cover cash flow needs such as payroll or inventory purchases?

Yes, a short-term personal loan may be used to cover immediate cash flow needs. This can include expenses like payroll, inventory purchases, or other business expenses. However, it’s important to consider the cost of the loan and whether there are other, more cost-effective financing options available.

What is the interest rate for a short-term personal loan?

The interest rate for a short-term loan can vary widely based on the lender, your credit score, and the type of loan. For instance, payday loans often have a much higher interest rate compared to payday alternative loans offered by a federal credit union.

What is the minimum amount I can borrow with a short-term loan?

The minimum amount you can borrow largely depends on the lender and the type of loan. A payday loan might allow you to borrow as little as $50, while installment loans might have a higher minimum.

What happens if I miss a payment on short-term loans?

Missing a payment can result in additional fees, increased interest rates, and potential negative impacts on your credit score. It’s essential to read the loan agreement carefully to understand the consequences.

Can I prepay my short-term loans?

Yes, many lenders allow borrowers to prepay their loans without any prepayment penalties. However, it’s crucial to check the loan agreement or consult with the lender.

What is the default rate on short-term loans?

The default rate varies by lender, loan type, and region. It’s always a good idea to check with the specific lender or look into industry statistics for a clearer picture.

What happens if I default on short-term loans?

Defaulting on a loan can lead to severe consequences, including increased fees, higher interest rates, legal actions, and negative impacts on your credit score.

Who is eligible for short-term loans?

Eligibility criteria can vary, but typically, you’d need a stable source of income, a checking account, and meet the lender’s age requirements. Even those with bad credit might be eligible for certain types of loans, like payday alternative loans.

Who decides if I am eligible for short-term loans?

The lender will decide based on their criteria, which often include checking your credit score, income, and other financial factors. Some lenders might allow you to pre-qualify to see potential loan terms without affecting your credit score.

Who do I contact to apply for short-term loans?

You can contact banks, online lenders, or federal credit unions to apply. If you’re looking for payday loan alternatives, specifically, a federal credit union or direct lender may be good options.

Where can I find short-term loans?

Short-term loans, including payday and installment loans, can be found through online lenders, banks, and credit unions. It’s essential to compare options to find the best terms.

Where can I get the best rates for short-term loans?

Rates for short-term funding will vary depending on the income, credit, and financial history of the borrower. Usually, lower scores are paired with higher rates, while borrowers with higher credit may be able to secure lower rates. 

Where can I get the most flexible terms for short-term loans?

Installment loans often provide more flexible terms compared to a payday loan. It’s also beneficial to shop around and pre-qualify with multiple lenders, credit unions, etc., to see the terms you might be eligible for.

How can I borrow money if I have bad credit?

If you have bad credit, consider payday alternative loans from a federal credit union or installment loans from lenders that cater to bad credit borrowers. Always ensure you understand the terms and can repay the loan funds as agreed.

What should I be aware of when signing a loan agreement?

When signing a loan agreement, ensure you understand the interest rate, any associated fees, repayment schedule, and consequences of missed payments. It’s also a good idea to check if you can prepay without penalties.

A Word From CreditNinja About Short-Term Personal Loans

While short-term loans can provide quick and easy funding, CreditNinja encourages all potential borrowers to research their options before submitting an application. Many lenders of short-term loans include high rates, hidden fees, and short repayment periods that often cause borrowers to fall into a cycle of debt. 

If you are looking for a better alternative to a payday loan, consider personal installment loans with CreditNinja. We’ve been a lender since 2018 and seek to provide manageable funding to borrowers of all credit types. Whether you are looking to catch up on bills or meet some short-term financial goals, CreditNinja is here to help you out. Check out our easy online application to see if you qualify for a personal loan today! 


  1. Payday Lending | Federal Trade Commission
  2. A recent TransUnion report shows personal loan balances are up 31% — here’s how to get a lower interest rate | CNBC
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