Short-term loans are loans obtained for a short period to take care of urgent monetary requirements. It is a form of credit, and you are required to repay the original amount borrowed with interest by a certain due date. This date of repayment differs based on the type of debt. For instance, some loans have a tenure of six to 12 months, while many others mature in one to two years.
Getting a short-term loan is a viable choice, especially for small or starting businesses that aren’t eligible yet for lines of credit from banks. However, these loans involve lower amounts, which can vary from $100 to as much as $100,000. Short-term loans aren’t only applicable to small businesses. Individuals faced with temporary cash flow issues could also apply for short-term loans.
Features of Short-term Loans
These loans are called short-term because of how fast they need to be repaid. The longest a short-term loan can stay before being paid off is 18 months. Any term longer than that becomes a medium or long-term loan. Some short-term loans don’t even specify a due date or a specific payment schedule. They will just allow individuals to pay the loans back on their own time.
Types of Short-term Loans
There are several forms of short-term loans. Here are some basic types of short-term loans.
1. Merchant Cash Advances (MCA)
This form of short-term loan is a cash advance that still functions like a loan. A lender loans the borrower the exact amount they need. The borrower repays the loan by giving the lender access to their credit facility. Every time the lender makes a purchase from the credit facility, a specific percentage is deducted from the borrowed amount until the loan is completely paid off.
2. Credit Lines
Credit lines or lines of credit are more like when you use a business card. A financial institution or bank sets a fixed amount that the individual can borrow. The borrower can withdraw this amount of money in installments or at once. However, borrowers cannot take more than the fixed limit, which is determined by their creditworthiness.
3. Online Loans
In a world where everything can be done online, it is rather easy to obtain a short-term loan. All you have to do is apply online and wait to be approved. Within minutes after getting your loans approved, the money is transferred to your bank account.
4. Title Loans
A title loan is a form of short-term loan that needs a property as collateral. Title loans are prominent for two primary reasons. Firstly, the borrower’s credit rating isn’t considered. And secondly, a title loan is quickly approved due to looser application needs. Many people ask do title loans affect your credit, and the answer is no. This is because your loan progress is reported to the credit bureau. You can quickly obtain a loan without the hassles and negative implications of traditional loan options.
5. Payday Loans
These are emergency short-term loans that are rather easy to get. You could even get them through high-street lenders. The only downside is that the full loan amount must be repaid with interest. The loan amount also has to be paid all at once when the payday comes. Generally, a payday loan comes with relatively large interest rates.
Pros
- Rapid funding time
- Shorter time to incur interest
- Easy to obtain
Cons
The major disadvantage of short-term loans is that you can oy obtain small amounts. Due to the loans being repaid sooner, they are offered in smaller amounts to ensure the borrower isn’t burdened with high monthly payments.
Short-term loans are beneficial for both individuals and businesses. For individuals, they serve as an essential way of getting urgent cash. While for businesses, short-term loans are a great way of fixing unforeseen cash flow issues.