How Do A Short Term Loan Works?

If you are going through minor problems of cash flow, then a short term loan will be providing you great solution. Contrary to traditional bank loans that are repaid over many years, this loan is structured in such a way that it must be paid back within few months.

What Is The Eligibility Criteria For A Short Term Loan?

Short term loans are quite flexible. But still they are never available to everyone. Mentioned below are some of the eligibility criteria that are essential for a short term loan.

  • You must be a permanent resident of US.
  • You must be at least 18 years old.
  • You need to be a salaried employee.
  • You must have a stable monthly source of income (for example social security and disability scheme)
  • An open as well as an active checking account is required.
  • Applicants with a credit score can also apply.

What Is The Process of Applying For A Short Term Loan?

The application and approval process of a short term loan will be depending on the state you live in as well as the lender with whom you are applying the loan. There are various types of short term loans present in the market. But the typical process of a short term loan will involve the following things mentioned below:

  • Make A Comparison Of The Available Options:

If you wish to get hold of the best loan, then must start to compare the different options available to you. Compare the rate of interest, fees along with the features to avail a loan that will meet all your requirements. You then choose an amount of the loan that you can afford for borrowing and it includes the rate of interest and the total amount that you have to repay.

  • Submit The Application:

Check the eligibility criteria of the lender. If you fulfil it, then submit your personal, financial as well as employment information that will be needed. You also agree upon a certain term to repay the loan completely irrespective of whether it’s a one-time payment or many. The date for repayments must be agreed on with your lender. It can be frequently completed online.

  • Wait for The Approval:

The lender is seen to do a credit check for accessing a borrower’s financial history. You will get aware of the loan approval fast after you submit the loan application. If it is successful, you will be receiving the loan. On getting the approval for your short term loan you will be sent a contract for the same to agree upon.

  • Get The Loan:

After you have signed the loan contract, you can await to get the loan in 1-2 working days or may be very soon. In most cases the loan is transferred to the applicant’s bank account. But some lenders also offer the option of receiving the cash from the store.

  • Repay The Availed Loan:

Different lenders arrange for repayment in different ways. You may be asked to sign one ACH authorization that will give the lender the permission of deducting the instalments from your account. Lenders who have physical branches can be provided with one personal check for the loan repayment. You will start to repay the loan on the decided date and continue to repay it until it is fully paid off.

What Are The Fees And Charges Involved In A Short Term Loan?


Lenders and the state that a borrower resides in are the two factors for deciding the fees and charges of a short term loan. It generally charges a fixed fee on the basis of the borrowed amount. For every $100 borrowed a fee of $10-$30 for each $100 can be expected. A fee of amount $15 for the borrowed $100 is quite standard. So if it is a 2 week’s plan such terms will be equating to almost 400% APR. Moreover lenders will mostly outline monthly as well as annual fees beforehand. If there is any late payment or even a single default on your short term loan, additional fees can be charged. Timely repayment and payment of all required fees are important and must be done as otherwise the lender may take you to court. So always borrow such an amount of a short term loan that can be afforded by you and where you will never miss a single repayment. This is because high late payment fees will sink you in more debt. If you find that you are struggling to make repayments, contact a lender for any arrangement.

So if you are in need of immediate cash suddenly you can apply for a short term loan. But always borrow the amount that you need and can pay off within a short time. Borrowing more than the required amount will make the repayment much difficult for you.

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Disadvantages Of Short Term Loan

Before borrowing a loan, decide what amount you require and by when you can pay it off. It will aid you in understanding whether short term or long term is appropriate for your financial requirements. Short term loan are useful, but it also comes with few disadvantages as mentioned below:

  • High Rate Of Interest:

The rate of interest of short terms loans are higher than that of the long term loans. Since short terms loans come with great monthly repayments, this can affect your personal and professional life as huge money will be needed for paying off your debt. It being a short term loan, you will be financing the main debt through a short tenure. Thus you will be paying off notable amount of your money each month in comparison to the repayment of any long term loan. 

  • Risk Of Borrowing Cycle:

Since short term loans can be easily obtained hence it can make you a regular borrower. Repayment of short term loan will become impossible. Borrowing one more time will be considered to balance off your original loan thus leading to a huge number of loans. It will be trapping you as well as your business in risk of borrowing cycle. So if you cannot repay the agreed amount of a short term loan, you can find yourself requiring another loan, thus causing a risky borrowing cycle. This will be a huge risk and will cause inefficiency in various business operations. So it is advised not to become dependent on the short term loans regularly because it will be creating bad effects on your life and the productivity of your business.

  • Negative Effect On Credit Report:

A short term loan can be availed to build up a credit score. But if you cannot repay the loan on the scheduled time, then the consequences are huge. The new debt to the income ratio along with the high cost of the new loan will cause a decrease in the credit rating drastically.

  • Penalties For Early Repayment:


Some lenders of short term loans are seen to impose such a contract that will limit the loan repayment at a certain period in order to make some profit from that short term loan. Sometimes, early loan repayment will cause high penalties because the lender will not be able to make any profit due to this early repayment. Such repayment penalty will compensate the lender and on the other hand will lead to huge costs as well as penalties to the borrower’s credit.

  • Huge Risk:

It is expensive to make use of the short term loans for making payments for any long term project. This is because long term loans lock in the present rate of interest. During general economic times, the rate of interest will rise slowly. Number of short term loans for financing long term projects will make you pay a much higher rate of interest with each of the loan. Thus the project’s cost will be increased. If your business is not in a good state and you require to renew your loan, then depending on many situation, you might need to pay a higher rate of interest. It might also happen that you are unable to renew that loan for your business. If you took a long term loan in the beginning, then all these problems would not have happened.

  • Impact On Daily Operations:

Late payments will make you pay huge penalties. The rate of interest can also get increased on your short term loan and the charges of late fees will add up. you may also be requested to pay off the loan as early as possible. Some people face difficulty to make such extra monthly payment. Any payment increase can cause a default and you may come at any credit risk. If you try to pay off these loans it can also hinder the performance on other on-going loans or other responsibilities. You will get into further debt and your situation would not improve. If you fall into more debt unwanted stress will occur on your daily operations.

  • Lines Of Credit:

Often some business build up lines of credit that let them borrow money fast when required. Then they clear it off as they want. A line of credit will basically allow you borrow as well as re-borrow money till this credit limit. You will be paying interest on that money which you borrow actually. It is a flexible and convenient borrowing technique of short term loan that allows you to reduce the interest costs. The interest charged on the lines of credit can also vary with the passage of time.

  • Dangers Of Secured Loans:

There are few short term loans that are secured. A payday is a type of short term loan that is secured by the check which you draw against the account. Auto loan is another short term loan that is secured by your car’s ownership. If you cannot pay back the payday loan because of shortage of money but your lender deposits the check, then it will be bouncing. A lender can take your vehicle during non-payment of an auto loan. Several short terms loans are costly and come with unfavourable needs.

So if you decide to borrow a short term loan, then think and decide wisely. Keep all the above disadvantages in mind and then take a short term loan for your need.

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Alternatives To Short Term Loans

What will happen when any emergency fund is not sufficient? You might get hold of quick and easily accessible cash source. One of it being short term loans. But short terms loans come with lots of cons and hence if you can then look out for these alternatives.

  • Get In Touch With The Creditor:

Do not panic if you have missed any payment or feel like you will miss one. At first get in touch with your creditors. Some of them will be working out a plan with you in case there is any emergency. For instance many utility companies along with hospitals will offer lower rate of interest including 0% interest rate payment plans to ensure that past due balances are cleared off during several months.

  • Take Help From Friends and Family:

If you require a fast short term loan, do not feel embarrassed to contact your friends and family. You can get some help from them to get free from the debt cycle. Instead of getting bothered by any predatory loan it is better to ask for help from your closed ones.

  • Plan A Budget And Save For Emergencies:

Have a look at your income as well as expenses. Ensure that you never spend more money than you actually earn. Avoid any unnecessary spending of money. Also try to build savings so that during emergencies, there is a cushion for falling back on rather than turning to any credit for aid.

  • 401(k) Loan:

If you are employed and in a financial problem, then this loan will be an excellent option for borrowing. It is much better than a short term payday loan. Since you are borrowing it from yourself, the interest that you will be paying back will actually be the money that you are putting back in your own retirement fund. You can borrow till $50,000 or may be half of the total money present in your account; the one which is less. The repayment time is within 5 years and quarterly payments are at least required.

  • Reverse Mortgage:

Homeowners who are aged 62 years and more have an option of a reverse mortgage during financial crisis. With the help of this, a property’s equity will get converted into a tax free payment for you. Money can be taken up front in the form of a line of credit. You can receive payments every month for a specific term or may be for that time till you reside there. You can also select mixed options. You will be keeping the title but lender will be paying every month for buying your home with the passage of time. As long as you live in that home, there is no requirement for repaying the loan. After you move out or die, the loan will become due and your house needs to be sold for loan repayment.

  • Avail A Credit Card Cash Advance:

If you borrow any cash against the line of credit of your credit card on the card, then it is known as a cash advance. Cash advance can be availed during emergency. If you do not wish to apply for a short term loan, then cash advance can be thought of. But they come with high rate of interest and extra fees. The APR of a cash advance is 5% high then purchase APR. You will also be incurring a 3 or 5 % fee on the every cash advance that you will take. It may not be a perfect solution, but little cheaper than the short term payday loan or title loan during urgent cash crisis.

  • Look Out For HELOC:


To cover up short term emergency requirements, you can leverage your home equity. A HELOC better known as home equity line of credit is one revolving line of credit extended to any homeowner who uses their home as collateral. The amount of money that you will be able to withdraw will be depending in the value of your home, the remaining balance of the mortgage, household income and credit report. HELOC will let you borrow the maximum money or may be as much as you require. Choose the schedule for repayment and you can set it for less than 10 years or even more than 20 years. But by the end of the term of the loan, the complete balance must be cleared off. You will be paying the interest on the borrowed amount. But you can deduct it from your income tax. An unemployed person will hardly be approved for this type of a loan.

Although short term loans are useful for personal and business use but since they come with a short amount and tenure along with high rate of interest, people are seen to avoid it if possible. During times of emergencies it is better to opt for alternatives to short term loans.

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Advantages Of Short Term Loan

An option of generating money for a stipulated time frame is called short – term financing. Short term lending has established itself as a very favorable service amongst people. Let’s try to figure out about the types of each of the credits and their advantages.

  • Cash Flows Solving The Issues:

Even the best of us have faced a slow season sometimes in their life. Small businessmen struggle to survive during this times and the risk of dissolving the enterprises pertain. But with meticulous planning, these situations can be averted but even a good strategy fails to help, short term loans can offer significant help. We can utilize the funds to pay the bills of the suppliers and the other operational costs that are associated. This can help you in another way, by managing your credit card bills while you wait for other factors to be in track. If the slow season comes around the time when you are supposed to pay your taxes, these short term loans can be used to pay the same, thus saving you from the trouble of IRS. A short Term loan takes lesser time to get processed. So, if your requirement is to get the access to the funds really fast, a short term loan is the answer to your problems.

  • Fast Money:

The greatest advantage of a short term loan is that it allows you to get hold of the funds real quick. In case of an emergency situation, where the requirement of money is dire, short term loans can provide the funds very quickly without much hassle and with a short documentation process and hence the time required is much much less than any other forms of loan.

  • Lesser Rate Of Interest:

This does not mean that all short term loans come with a low interest rate, like for example a lender can charge a rate which is higher if a secured asset can’t be produced. Although short term loans against mortgages offers a low interest rate which means that money can be saved in both ways, once by the rate of interest applied and secondly by the time needed to acquire the loan.

  • Zero Collateral:

Short term loans can be taken without keeping any of your assets as a tie up with it. This tying up of your property is termed as collateral and when you decide to use something as collateral, it automatically puts you a risk parameter because in case of a default that asset will be seized, but in such a loan you don’t need to put anything at risk to get the funds. Though short term loans doesn’t really counts mortgages it also may not require any of your assets to be kept as collateral.

  • Foreseeable:

It is not easy to predict or foresee how your finances will shape up in the future. Neither nobody can tell exactly how the economy will turn up in the next 20 or 30 years. If you take a loan for a very long term, you will have to keep paying for a long time in the future, even if your financial situation gets worsened. Rather it is much easier to foresee your immediate future and budgeting for the same with short term loan is much more feasible.

  • Adaptability:

You may find the terms to be extremely adaptable and flexible while working with multiple short term loans. For instance, you can keep paying the interests of every month and then the remaining balance can be paid off at a later date as per the convenience. This will allow you to go for a loan tailor-made for your situation.

  • Less Pressure:

If you owe money for a long duration to someone and simultaneously see the interest rates getting hiked, it not only affects you emotionally but it takes a toll on your psychological health as well. Opting for a short term loan will rid you of the loan obligations quickly and you can live freely after shaking off that burden.

  • Enhancing Credit Rating:

The credibility of businessmen are defined by the credit ratings. When they opt for a loan or some credits, they basically build up their credit history. This goes without saying that these loans or credit forwards are meant to be repaid in time to ensure that that credit rating is positive else it goes for a toss. Now, why businessmen prefer short term loans are because they are capable of giving their credit ratings a major boost. By paying these short term loans they ensure that their credit ratings remain good enough to get a longer and bigger term loan in the future because it has been noticed that small entrepreneurs often struggle to maintain a good credit rating.

So as we can see, there are some very obvious advantages of online loans as they generally help us to evade an unforeseen situation quickly. But it is really important to remember this that while choosing from an online lender always prefer those with a good reputation in the market.

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