If you are looking for funds to make ends meet quickly, you may be looking into short-term loan options like a Payday loan, title loan, 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 there are other more sustainable options available that can help you take care of your expenses.
What Is a Short-Term Loan?
A short-term loan is a type of funding 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, or even a mobile app in some circumstances.
Types of Short-Term Loans
Below are some common types of short-term loans available to consumers.
A payday loan is a type of unsecured funding that gives borrowers access to low loan amounts at very high interest rates. Payday loans also usually have extremely short payback terms. Since these types of loans are just meant to help consumers make ends meet until their next payday, lenders typically expect full repayment of payday loans in about fourteen days or less.
Car Title Loans
Car title loans are a type of secured short-term loan that come in low loan amounts with high interest rates. Since title loans are secured by the borrower’s free-and-clear vehicle title, borrowers must make sure to keep up with their loan payments if they want to maintain access to their vehicle.
Cash Advance Mobile Apps
Cash advance mobile apps exist to help give consumers early access to their paychecks. Typically, consumers connect their bank accounts to the cash advance app and receive funds via direct deposit. Then, once they receive their paycheck from their employer, the mobile app will deduct the loan funds straight from that paycheck.
Pawnshop loans involve the borrower giving up a piece of property in exchange for cash. With a pawnshop loan, borrowers leave whatever property they used as collateral in the possession of the pawnshop owner for the duration of their loan. Borrowers may regain access and ownership to their collateral after they have paid back their pawnshop loan in full. If a borrower defaults on their pawnshop loan, the shop owner has the right to sell that property to another customer.
Why Do People Seek Out Short-Term Loans?
What makes short-term loans so popular amongst people looking for fast cash? For many, a short-term loan provides benefits like:
- Quick loan applications.
- Fast approval and funding.
- No collateral required.
- Easy and flexible approval requirements.
In the midst of trying to straighten out your finances during an emergency, the last thing many loan applicants want to do is dig around for obscure documents, find personal references, or answer a bunch of unnecessary questions. With a short-term loan online, borrowers can complete their intitial application in just a few minutes or less and get a pre-approval status almost immediately.
When people are going through a tough financial emergency there isn’t always time to wait around for funding to process and get deposited into a checking account. Instead, consumers are usually looking to have money deposited into their account in a few days or a few hours if possible.
With many types of short term-loans online, approved borrowers can have their funds deposited directly into their account promptly after approval, which gives them access to their emergency cash almost instantly.
Another reason why consumers may seek out short-term loans is because this type of funding is usually unsecured. An unsecured loan is a kind of funding that does not require the borrower to offer any piece of land or property as collateral. Loans that do require collateral from borrowers are referred to as secured loans.
Unsecured loans can provide a huge financial relief to people who may not have high-equity property to use as collateral, such as a home or a free-and-clear vehicle title.
Flexible Credit Score Qualification Requirements
If you have less than perfect credit, you know just how difficult it can be to find approval for quality loans when you need them. Some traditional lenders, like a bank, only work with borrowers who have exceptional credit and may not even consider applicants who have average or low credit.
Some are relieved to find that many short-term bad credit loans have no minimum credit score requirement. Instead, many lenders for these types of loans will just request a soft credit check to take a look at your most recent credit report and credit score. That way they can conform that borrowers have not recently declared bankruptcy or are currently going through pre-bankruptcy counseling.
Potential Risks of Short-Term 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 loans are 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 bororwer’s individual budget, balloon payments may make it extremely difficult for some people to finish paying off their loan.
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 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 Cyle 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. The interest rates and other fees charged by many short-term loan providers can make this type of funding quite expensive. In fact, depending on loan amounts and rates, some borrowers may actually find that their minimum balance due is insufficient when to comes to lowering the total balance due on their loan.
Alternatives to Risky Short-Term Loans
Thankfully, there are plenty of short-term loan alternatives borrowers can turn to. Short-term loan alternatives are commonly available with financial institutions like banks, direct lenders, online lenders, or credit unions.
Some popular types of short-term loan alternatives borrowers may consider are:
- Short-term personal loan.
- Unsecured personal loans.
- Credit cards/your credit limit.
- Personal line of credit.
- Salary advances.
- Home equity loans.
- Buy now, pay later loans.
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 looking for a long-term or short-term loan.
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 towards 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!
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 rates or annual percentage rates 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 rates you will qualify for. However, there are some lenders willing to offer special deals to subprime borrowers who can offer high-equity collateral to secure their loan.
- 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 come 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.
- Applicaiton 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 monthly to pay off.
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 loan documents most lenders require are:
- Government-Issued Photo ID: To confirm your identity, lenders require proof of ID such as a driver’s lincense, 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 make sure you are getting paired with appropriate loan amounts, terms, rates, etc.
Bottom Line: Short-Term Loan
Short-term loans can provide borrowers with great benefits like fast approval and easygoing qualification requirements. But, they unfortunately also can come with harsh risks like credit score declines, high rates, hidden fees, and the potential to fall into a vicious cycle of debt. After doing a bit of research on your own you may find that there are other more convenient funding options out there to help you take care of your current expenses.