How Does A Short Term Loan Work?

If you are going through minor problems of cash flow, then a short-term loan will be providing you a 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 Are 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 the 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 for 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 fulfill 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 wait to get the loan in 1-2 working days or maybe 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 installments 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 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 into 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 it 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.

A short-term loan is useful, but it also comes with few disadvantages as mentioned below:

High Rate Of Interest:

The rate of interest of short terms loans is higher than that of 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 is a short term loan, you will be financing the main debt through a short tenure. Thus you will be paying off a 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 the 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 at risk of the 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 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, the 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.

A number of short term loans for financing long term projects will make you pay a much higher rate of interest with each of the loans. 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 situations, 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 payments. 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 businesses 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 to 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 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. An 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 a 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 unfavorable 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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