If you need cash quickly, you might be considering a short term loan. You have heard of short term loans where you can borrow a couple of hundred dollars or even a few thousand dollars online, in only a few hours, and with no collateral. This can be very tempting, especially if you are in immediate need of emergency funds for things like medical bills.
However, you have also heard that short term loans are high risk and you have heard stories of friends and family who end up stuck in debt. Before you apply for a short term loan let us help you know if it is worth it to you.
What is a Short Term Loan?
A short term loan is a personal loan given with no collateral, most only require ID and proof of employment. Because there is no collateral these loans typically have the following features:
- Lower borrowing amounts, typically a couple of hundred dollars, however, some may be a few thousand dollars
- Charge much higher interest rates, as well as a number of fees
- These loans also typically have significant fees and penalties for missed payments
- Repayments need to be paid in full within the terms of the loan, almost always within a year, often within a few months
- The first repayment is typically made immediately, and repayments are typically required weekly, fortnightly or monthly
Advantages of Short Term Loans
The greatest advantage of a short term loan is the ease and speed of access to the required cash.
Short term loans are approved and paid fast. They do not require lengthy approval processes or large amounts of paperwork. Once approved, loan recipients can often receive their loan within 24 hours, sometimes even within a few hours.
Short term loans are much more accessible. Loan recipients with low credit ratings have a much higher chance of being accepted than if they were to go to a bank or other lending institution. Short term loans also do not require collateral, making them more accessible.
For those without emergency funds available, a short term loan can literally be a life-saving loan.
Additionally, since the terms of the loan are short, you are not tied into repayments for a long period of time. If you meet your repayments, you will pay off your loan within a year. This also has the advantage of decreasing total interest costs compared to the same loan over a longer repayment period (as long as you make your repayments in full and on time).
Disadvantages of Short Term Loans
As we have mentioned, short term loans do not come without risks and disadvantages, and loan recipients need to be aware of these risks and disadvantages to make an informed decision.
There are three primary disadvantages to short term loans. First, Because there is often no collateral required, interest rates are typically much higher than other loans. Second, because the loans are short term, regular repayments are required, often weekly. These repayments often start immediately which can put the loan recipient under financial stress.
Thirdly and most importantly, if you are unable to make your repayments on time, sizeable late fees are often applied. If you are already stretched financially and you begin to miss payments you may fall into a cycle of borrowing and debt that is very difficult to break out of.
Additionally, short term loans are typically limited to lower borrowing amounts. If the borrower is in need of more than a thousand dollars, they may find it difficult to find a suitable short term loan.
What You Need to Know Before Taking Out a Short Term Loan
Before taking out a short term loan you need to know what type of short term loan is right for you. There are many types of short term loans, each with varying terms and conditions.
- Line of Credit
- Short Term Bank Loans
- Bank Overdraft
- Payday Loans
- Online or Instalment Loans
Here is a breakdown of the various short term loans.
Once you have the right loan you should be able to answer these questions:
- How long is the repayment period?
- How frequent are your repayments?
- How much is each repayment?
- What are the fees and penalties for missing payments?
If you can make the necessary repayments on time for each payment for the duration of the loan, then a short term loan might be the answer for you. If not you should consider the fees and penalties for missing payments.
Can you afford those now? Can you afford them in the future? If not a short term loan may not be the best answer for you.
It is also worth understanding the interest rate and the Annual Percentage Rate (APR). The APR is typically a more accurate estimate of the cost of the loan to you as it includes other costs, such as fees, associated with borrowing the money.
Understanding the APR will allow you to compare the short term loan options available to you and select the most affordable loan. For instance, the APR will vary amongst providers but may also change depending on the loan term or repayment cycle.
Is a Short Term Loan for You?
Short term loans carry some risks and so you need to give them serious thought.
However, if you are in need of cash fast for personal reasons, or you have a bad credit history, but can make the repayments in full and on-time, a short term loan might be a suitable solution for you.
Lenders like Captain Cash, give great estimates of weekly, fortnightly or monthly repayment amounts and allow you to see if you can meet your obligations and decide if the loan is for you.