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By: Frank Partnoy | Updated: 2024-03-03 07:42:49

Have you ever found yourself in need of quick cash for an unexpected expense or emergency? If so, you’re not alone. Short-term loans are designed to help you cover such costs and get back on your feet. But with so many options available, how do you know which one is the best fit for your needs? Here we’ll explore the ins and outs of short-term cash loans, their advantages and disadvantages, and some alternatives to consider.

Short-Term Loans Explained

A short-term loan is a type of personal loan. It has repayment period ranging from one week to one year or less. These are unsecured loans and are often utilized for home renovation, debt consolidation, or covering personal expenses.

When considering a short-term unsecured loan, examine the contract for any potential fees or penalties, such as origination fees, late fees, and prepayment fees.

Comparing Short-Term and Long-Term Loans

The main distinction between short-term and long-term loans lies in their repayment periods. Short-term loans typically have repayment periods ranging from one week to one year, whereas long-term loans usually have repayment periods of up to 10 years.

Short-term loans tend to have lower Annual Percentage Rates (APRs) than payday advance loans. However, they often carry higher interest rates and shorter repayment periods than long-term loans.

Applying for a Short-Term Loan

Applying for a short-term loan involves several steps, including checking your credit score, determining the loan amount, and comparing offers from different lenders.

1. Check Your Credit Score

Your credit score is a crucial factor in determining your eligibility for a short-term loan, as well as the interest rate you’ll be offered. Before applying for a short-term loan check your credit score to ensure you meet the minimum requirements for your desired loan.

You can verify your credit score and access your credit report for free through various online platforms, such as Credit Karma or Experian.

2. Check Eligibility Criteria

Before applying, make sure you meet the lender’s eligibility criteria. Common requirements include being at least 18 years old, having a regular source of income, possessing a valid bank account, and residing in the state where the loan is offered.

3. Gather Required Documents

Prepare the necessary documents and information you’ll need for the application. This typically includes:

  • Proof of identity (e.g., driver's license or passport)
  • Proof of income (e.g., pay stubs, bank statements)
  • Social Security number
  • Contact information
  • Bank account details

4. Fill Out the Application

Go to the lender’s website and fill out the online application form. You’ll need to provide personal, employment, and financial information. Ensure all the information you provide is accurate to avoid delays in processing.

5. Submit Your Application

Once you’ve completed the application, review it to make sure all the details are correct, then submit it. Some lenders may ask for additional documentation at this point, so be prepared to provide it if necessary.

Types of Short-Term Loans

Personal loans, online payday loans, and credit union loans are some of the options you can consider when seeking a short-term loan. Each type of loan has its own set of advantages and disadvantages,.

Personal Loans

Personal loans are a flexible short-term loan option that offers variable interest rates and repayment periods. To be eligible for a personal loan, applicants must have a minimum credit score of 650 and an annual income of at least $45,000, among other requirements.

Loan amounts typically vary from $2,000 to $10,000, with repayment terms ranging from 3 to 36 months.

Payday Loans

Payday loans are high-cost, short-term loans that charge fees that can equate to APRs of 400% or higher. These loans do not require a traditional credit check or confirmation of the borrower’s ability to repay, making them a last-resort option for those in need of quick cash.

The money you borrow is automatically repaid from your bank account on your next payday, making the process hassle-free and more cost-effective than traditional payday loans online.

Credit Union Loans

Credit union loans are a more affordable short-term cash loan option that offers lower interest rates and flexible terms. These loans have a maximum APR of 18% and provide more flexible terms than payday loans, with repayment periods up to a year. Membership history, creditworthiness, and income are all factors that credit unions may consider when making loan decisions.

As a member-owned and member-operated financial institution, federal credit unions can be more accommodating to borrowers with poor credit than traditional banks or online lenders.

Comparing Short-Term Loan Lenders

When assessing short-term loan lenders, consider factors such as interest rates, origination fees, and loan terms. These factors can have a significant impact on the overall cost and affordability of the loan.

Interest Rates

By comparing interest rates among short-term loan lenders, you can identify the most cost-effective option for your financial needs.

In addition to the interest rates themselves, consider the annual percentage rate (APR), which includes the interest rate as well as any additional fees associated with the loan. APRs can provide a more accurate representation of the true cost of the loan.

Origination Fees

An origination fee is charged by lenders for processing a loan application and usually ranges from 0.5% to 1% of the loan amount. These origination fees can add to the total cost of a short-term loan, as they are typically a percentage of the loan amount.

Loan Terms

Loan terms, including the repayment period, interest rate, and fees, can have a significant impact on both the monthly payment and total interest paid. Review the terms and conditions of each loan offer carefully, taking these factors into account when making your decision.

Consider the flexibility to make extra payments, the availability of deferment or forbearance options, and other details provided by each lender.

Short-Term Loans for Bad Credit

If you have a bad credit score, obtaining a short-term loan can be challenging. However, there are options available for those with poor enough credit scores, such as online lenders, secured loans, and using co-signers or collateral.

Online Lenders for Bad Credit

Online lenders can be a potential source of short-term loans for bad credit. These lenders typically offer a convenient and fast way to obtain short-term cash loans, often with lower interest rates than traditional lenders.

They also provide more flexible repayment options and may be more willing to work with borrowers with poor credit. However, it’s important to note that some online lenders may have higher interest rates than conventional lenders and may not be as accommodating to borrowers with poor credit.

Secured Loans

Secured loans can be a viable option for borrowers with bad credit, as they require collateral to back the loan. This type of loan may provide lower interest rates and larger loan amounts, but there is a potential risk of losing the collateral if the loan is not repaid. On the other hand, an unsecured loan does not require collateral, but may have higher interest rates.

Co-signers and Collateral

Using co-signers or collateral can improve your chances of obtaining a short-term loan with bad credit. A co-signer is an individual who agrees to assume responsibility for repaying the loan should you be unable to do so. Their credit, payment history, and financial standing are considered in the loan application, helping you secure approval for a loan, even with poor credit.

Collateral, on the other hand, is an asset that you offer to the lender as a form of security for the loan. Should you fail to repay the loan, the lender can repossess the collateral to recover their losses.

By leveraging co-signers or collateral for loan funds, you can improve your chances of securing a short-term loan despite having bad credit.

 


 

Short-term loans can be a helpful solution for covering unexpected expenses and emergencies. By understanding the different types of short-term loans, evaluating lenders, and considering your financial needs and credit situation, you can make an informed decision about the best loan option for you.

If a short-term loan isn’t the right fit, don’t forget to explore alternatives such as borrowing from friends or family, using emergency savings, or seeking out payment protection plans.

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