Learn more about all your short-term lending choices

Short-term loans are a handy option when you need to access money quickly. You can use short-term loans to pay for emergency expenses, medical expenses, home improvement projects, and more.

In this article, we’ll discuss your short-term loan options, how to get them, and the pros and cons.

What is a short-term loan?

A short-term loan is a type of unsecured financing that offers a relatively short repayment period – less than 2 years. However, some short-term loan products may offer a term of a few months or a few weeks. The “terms” of short-term lending can vary quite considerably.

Most short-term loans do not require collateral. Lenders offering these loans also may offer looser income requirements and approve individuals with lower credit scores. Loans with longer terms are often secured loans,  requiring collateral. Because of this, short-term loans have stricter approval guidelines. They may only approve individuals with a good credit score and a lower debt-to-income ratio.

Lending products that are considered “short-term loans” are typically personal loans. Short-term personal loans have a shorter repayment period than the more common personal loan term of 24 to 60 months.

How does a short-term personal loan work?

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. While most personal loans are repaid over 2 – 5 years, short-term personal loans have repayment terms of less than two years. Some short-term loans have a term of only a few weeks.

Short-term personal loans may offer a lower interest rate. However, as these loans need to repaid quickly, they also carry higher penalty fees. The amount of these loans is also lower than a more traditional personal loan.

If you are shopping for a short-term loan, be mindful of the loan’s interest. A lender might combine a low interest rate with higher fees to create a higher annual percentage rate (APR). In some situations, the lender charges a higher interest rate to help offset the cost of creating the loan or the risk of not requiring collateral. Always read the loan terms to find any details that could impact your ability to pay back the loan.

How to get a short-term personal loan

The application process for getting a short-term loan is straight-forward.
A short-term personal loan requires you to complete the same four steps as you would to get a standard personal loan. However, with a short-term personal loan, you’ll likely have cash in hand within a few business days. Here are the steps:

1.  Get prequalified with a few lenders. This is a soft credit check, which usually doesn’t affect your credit score. This step allows you to compare loan offers from several lenders.
2.  Review your loan offers. Short-term lenders usually provide a list of eligible loans and their corresponding terms. You should receive the list fairly quickly –about an hour after you apply to get   prequalified.  Always compare offers from other lenders before agreeing to any terms.
3.  Apply for the loan. Once you’ve compared loan estimates, apply for the loans that meet your needs and your budget. You will need to provide your bank account information, form of   identification, pay stubs, bank statements, and tax forms.
4.  Sign the loan contract and receive your funds. Some lenders can transfer funds to your bank account within the same business day, depending on what time you agree to the terms.

The pros and cons of short-term loans

While the application process is simple, it’s crucial that you understand the pros and cons of these loans. Always read the contract and the terms before you sign your name.

Pros

• Relaxed 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 high-interest debt, you can experience relief fairly quickly.
• Varied repayment options. Short-term loans have more flexible repayment options.
• Lower interest rates Since short-term loans are repaid over a shorter period of time, many lenders offer more competitive rates. However, this usually only applies to installment loans and isn’t always the case. Payday loans carry a much higher interest rate.

Cons

• Steep penalties and fees. Some lenders charge origination fees, late fees and prepayment penalties. To avoid these costs, 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 accompanies a longer-term loan and larger loan amount. However, some short-term loans have high APRs. For example, payday loans can have an APR as high as 400%.
• Lack of credit building. A short-term personal loan likely won’t build your credit. But 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. This is because the underlying cause of their debt goes unaddressed, leaving borrowers feeling trapped and continually making payments.

FAQs about short-term loans

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 applying online through the lender’s website, over the phone with a representative, or in-person at a brick-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 brick-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.

The verdict on short-term loans

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.