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.
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.