Short-Term Loans: Know All Your Options

If you’re considering a short-term loan for nearly any reason, you’re undoubtedly not alone. Short-term loans are enormously popular because short-term financing can offer borrowers fast and flexible access to the funds they need. For instance, if you’re facing a fluctuation in earnings, medical issues or an emergency home repair, this type of loan could be the best option for you.

Let’s explore why you might consider a short-term loan, the common types of short-term loans available, how to get one and the pros and cons to consider before applying.

A “short-term loan” is a type of unsecured financing that uses a relatively short repayment period – less than 2 years and perhaps just several months or even just several weeks. Even though short-term loans don’t require collateral, lenders may still have less strict income and/or credit score requirements than with a longer-term, secured loan requiring collateral. 

While multiple types of financing can be used, a short-term loan refers to a personal loan in most cases. Short-term personal loans use a shorter repayment period than the more common personal loan term of 24 to 60 months.

Personal loans are a type of installment loan. That means the borrower receives a lump sum that’s repaid with a fixed monthly payment over the course of the loan’s term. Personal loans are usually unsecured, meaning they don’t require collateral. While most personal loans are repaid over 2 – 5 years, short-term personal loans have repayment terms of less than 2 years as likewise noted earlier.

Short-term personal loans may use a lower interest rate but have higher penalty fees and a smaller loan amount than longer-term, traditional personal loans like one you may get from Rocket Loans^SM. The lower interest rate on a short-term loan is likely because the lender is facing less risk since the repayment will be made over a shorter period of time.

However, a lender might combine a modestly low interest rate with higher fees to actually create a higher annual percentage rate (APR). Or the lender could charge a higher interest rate to help offset the cost of creating the loan or the risk of not requiring collateral. Either way, make sure you understand your loan’s rate and terms before taking on the payment.

Several types of other short-term loans are available to borrowers. We’ll look at some examples below.

Payday Loans

A payday loan is a loan you can use over a short time frame – typically, around 2 weeks – that will coincide with receipt of your next paycheck, which is when you must repay the loan. Most payday loans are no more than $500 and have a high annual APR if you don’t repay the loan on time.

Unlike traditional loans, payday loans often come with an exorbitant APR of around 400% or higher, and the lending of these loans can be predatory, or deceptive. Because of these risks, it’s best to be cautious when considering a payday loan.

Cash Advances

A cash advance is a short-term loan offered by many banks and credit card companies as well as some alternative lenders. You borrow the money against your credit card’s line of credit, then pay it back on your next billing cycle. If you don’t pay off your balance quickly, you could be charged high interest since cash advances typically use a higher APR than typical transactions.

Bridge Loans

A bridge loan is designed to help home buyers who are buying and selling at roughly the same time and may need temporary financing in between the time when their new home closes and their soon-to-be old home sells. A bridge loan can cover the down payment or closing costs on the new property, and you’ll pay it off when your existing home sells.

The application process for getting a short-term loan works as any other but at lightning speed. Lenders that offer short-term personal loans understand that borrowers are typically in emergency circumstances, and these lenders operate to get you funds quickly.

You’ll follow the same four steps you would to get a standard personal loan, and you’ll likely have cash in hand within a few business days. Here are the steps:

1. Get prequalified with a few lenders. You can learn more about a loan option by having the lender evaluate your creditworthiness through a soft credit check, which usually doesn’t affect your credit score. That means you can get prequalified with several lenders to compare loan offers.

2. Review your loan offers. Typically, short-term lenders will give you a list of eligible loans and their corresponding terms, and this usually only takes about an hour. Be sure to compare offers from other lenders before agreeing to any terms.

3. Apply for the loan. Once you’ve compared loan estimates, you can go ahead and apply for the loans you’re interested in. You’ll likely be asked to provide your bank account information, form of identification, pay stubs, bank statements and tax forms.

4. Sign your name and receive funds. Some lenders can transfer funds to your bank account within the same business day, depending on what time you agree to the terms.

As easy as it may sound to get a short-term loan, there are some significant considerations to take into account before inking a contractual agreement that could determine your financial security.

Next, let’s review some pros and cons of short-term loans.

Pros

• Easier eligibility requirements: While larger-sum, longer-term loans require a good to excellent credit score to qualify, a bad credit history isn’t an automatic disqualification for some forms of short-term lending.
• Fast payout: You could be approved and receive your loan in your checking account by the next business day, depending on the lender you choose. When paying off medical bills or consolidating debt, you can experience relief fairly quickly.
• Varied repayment options: Short-term loans have more flexible and varied repayment options, so it’s important to pay close attention to the terms and conditions. The biggest pro of repaying a small loan is that you’ll be debt-free sooner rather than later.
• Lower interest rates, in some cases: Since short-term loans are repaid over a shorter period of time, many lenders will offer more competitive rates. However, this usually only applies to installment loans and isn’t always the case.

Cons

• Steep penalties and fees: Some lenders may charge origination fees, late fees and prepayment penalties. To avoid these costs and entering a never-ending debt cycle, it’s vital that you read the terms and conditions carefully. Be certain you can pay back the loan sum on time without missing a payment.
• Higher APRs: In many cases, a higher interest rate will accompany a longer-term loan and larger loan amount, but some short-term loans have high APRs. For example, payday loans can have an APR as high as 400%.
• Lack of credit building: Taking out a short-term personal loan likely won’t build your credit. In fact, if you miss a payment or fail to repay your loan by the end of the term, it will damage your FICO^® Score and remain on your credit report for years.
• A lingering debt cycle: One of the most common issues that short-term borrowers face is a never-ending cycle of debt, which often makes their initial debt worse. This is because the underlying cause of their debt goes unaddressed, which can leave borrowers feeling trapped and out of control.

Discover more about short-term loans with the answers to these common questions.

What is a short-term personal loan?

A short-term personal loan is a personal loan that offers a relatively short repayment period of less than 2 years. These loans also come with a smaller loan limit than a standard personal loan.

How can I get a short-term loan?

You can apply for a short-term personal loan by submitting an application online through the lender’s website, over the phone with a representative, or in-person at a bricks-and-mortar location.

Where can I get a short-term personal loan?

The lenders that most commonly offer short-term personal loans are traditional banks, online lending platforms and credit unions. Begin your research by reviewing loan offers from your bricks-and-mortar bank and compare them against your local credit unions while also investigating offers from online lenders.

What are the alternatives to a short-term personal loan?

If you’ve decided you don’t want to use a short-term personal loan, a few alternatives may be worth considering. These include:

• Using your home equity: Tapping into the equity in your home can be a wise financial decision for borrowing money in the short term. You can utilize a home equity loan or a home equity line of credit (HELOC) to access the funds you need.
• Borrowing from friends or family members: If you’re strapped for cash and need temporary financial assistance, consider asking friends or family members for a short-term loan. Be sure to address repayment expectations upfront to avoid potentially straining a relationship.
• Applying for a traditional personal loan: If you need a loan worth several thousand dollars or more, a traditional personal loan may be your best option.

Can I pay off a short-term personal loan early?

Yes, you can usually pay off a personal loan early. However, some lenders may charge a prepayment penalty. Be sure to read your paperwork carefully before sending in your final payment.

Although a short-term personal loan may seem like a great way to access cash quickly in your time of need, it’s important to consider the benefits and risks associated with this type of borrowing. While a short-term loan may provide temporary help, it could put you in a worse financial situation for the future.

If you’ve decided a short-term loan isn’t right for you, consider applying for a longer-term personal loan, which can offer you a lengthier payback time.