If you are in a financial emergency and need quick access to money, you might consider short-term loans. They are suitable for borrowers who want to secure a loan and pay it back quickly. Short-term loans, when used responsibly, can be a great tool to get you out of a financial crisis during problems like an emergency bill or automotive repair.
However, like all other loans, they also come with some disadvantages. Let us take a look at the pros and cons of these loans to help you decide whether or not they are suitable for you.
1. It Is Easy to Apply
What makes this type of loans suitable for those who need quick cash is their fast financing process. It is very easy to apply for a short-term loan. They involve less paperwork as lenders only require bank statements from a few previous months.
If you’ve experienced the arduous application process that comes with traditional financing institutions like banks, you’ll notice a big difference with short-term loans.
If you are a business owner, you probably have a lot of errands to run. As such, you’ll appreciate a financing option that features minimal paperwork as it will allow you to focus on your day-to-day operations. And that is what makes short-term loans a great solution.
2. You Receive Your Loan Quickly
Short-term loans can provide you with quick access to money. As long as you meet the lending criteria, the funds can even be deposited into your account on the same day, depending on the lender.
Another thing is, qualifying for these loans is very easy. They have high approval ratings, which means even small businesses with limited credit history could still be approved. Although the lender will review your credit score, their requirements aren’t as strict compared to other financing options.
3. No Need Going to the Bank, You Can Take It Online
Gone are the days where you had to walk to the bank to apply for a loan. Nowadays, online loans provide a high level of convenience to consumers. Online lending has become a norm, and individuals are becoming more confident with services offered by loan lenders. Therefore, you can apply and get your request approved from wherever you are.
1. May Have Higher Interest Rates
Short-term loans are unsecured. So lenders are at high risks of borrowers defaulting. To compensate for this, they charge high-interest rates than other loan types. In fact, you may end up paying the same interest or more with someone who took the same loan amount for the long term.
However, you can minimize the total loan amount by repaying your loan as quickly as you can. This is very important, especially if your lender offers discounts for early repayments.
2. Frequent Payments Are Required
Most long-term loans allow borrowers to make monthly repayments. But with short-term loans, you make weekly and sometimes, daily payments. Now, this can be challenging, especially for businesses that experience fluctuations in their cash flow. It’s easy to end up defaulting or with penalties.
If you’re taking a short-term loan for business, you may want to consider whether customers make timely invoice payments and how fast you are at credit sales. It’s always wise to ask about the frequency of the payments from the lender before getting into a contract with them.
You can also consider trade credit for your business instead. This allows you to buy items from a supplier on credit and pay for them later.
3. There’s the Potential for Significant Debt
Some short-term loans charge borrowers arrangement fees and penalties for making late payments. You can therefore end up in debt easily. Make sure that you read the terms and conditions on the loan when applying to check whether there are any extra charges. Additionally, ask your lender whether they allow early repayments as it will help you pay off your loan quickly.
But we should mention that getting a loan is always risky. It’s why individuals are advised to take one only when they are sure that they can pay it on time and in full. Otherwise, you may find yourself in a debt cycle, where you take a new loan to pay off your current loan.
Final Thoughts: Should I Take a Short-term Loan?
Short-term loans give you quick access to money. However, they come with some drawbacks that you should consider. If you can access other favorable financing options, for instance, low-interest loans, you should consider them. Nevertheless, short-term loans can still be beneficial. But you may want to think about your specific condition and need before submitting your application.