A short-term loan provides you with emergency funding. You have experienced a catastrophic one-time event or a temporary hardship? The loan helps you get by until additional funds are available.
Short Term Loans for Emergency Situations
Short Term Loans From Traditional Lenders
When you have good credit and need short term loans to overcome a hardship, consider visiting with traditional lenders first. If your bank or credit union can provide you with the funds, you are likely to receive better interest rates. Bank loans also enjoy more manageable repayment schedules than going through short term loan lenders.
Your bank or credit union is already aware of your financial situation. This allows you immediate access to the best loan terms possible given your assets.
In-person Application for Short Term Loans
Stop by your bank or credit union in person to speak to a representative familiar with your account or immediate access to it for research. By connecting with a local person, you also increase the likelihood of the lender reviewing all possible avenues for you to obtain funding.
A local bank often has the same parameters for lending as a national bank but can find alternate ways to match you with the appropriate loan.
Short Term Loans and Credit Scores
For example, some banks or credit unions may not lend to you if your credit score is below a certain number or your debt to income ratio is too high. However, a local bank or any financial institution specifically reviewing your credit information can assess these variables both together and independently.
If your debt to income ratio is a little high but you have an excellent credit score those two can balance each other out. Likewise, a lower credit score with an excellent debt to income ratio would suggest that you are a responsible user of credit. A bank can then determine you are likely to repay the loan in a timely fashion.
When you are speaking to a person directly, you are more likely to encounter a little more flexibility in this area. Local representatives are able to review all of this with you in person without other demands.
For example, when you call a bank’s toll-free number it often leads to a call center. This means you encounter someone who is going through the standard script in terms of loan paperwork. If you don’t check all of the checkboxes, the representative is not necessarily going to research other options available. This makes the in-person approach best.
Benefits of Obtaining Local Short Term Loans
When you are researching short term loan options, visiting with traditional lenders like a bank or credit union is also instrumental because you may find yourself able to secure a better loan.
Short term loans may be what you think is best for you because you only need money for a brief time. However, a long-term loan may provide you with the funds you need while providing financial flexibility in terms of repayment.
For example, you took out a $6,000 loan to pay all of you bills for a couple of months of unemployment or to finance a vacation. This way you may be able to repay the loan quickly. When you can, it is a solid option. However, you will be temporarily reducing your cash flow while you repay the loan in full.
If you took out the $6,000 loan for a 12-month period, even without interest, you are facing a $500 per month repayment schedule. With interest, that total is going up.
While your budget may be able to handle the loss of $500 per month short-term, you will still be paying interest charges. Often, some of the higher interest rates allowed are charged on short term loans.
By investigating a long-term option, you may be able to find a more agreeable repayment schedule.
A $12,000 loan over a 60-month period – the type of loan you would typically get for a small car purchase — would only require repayments of $200 per month plus interest.
If you are concerned about the added cost of interest, review the terms of two different loan types. The higher interest rates of short term loans can quickly add up to the same rates charged over a longer loan period.
High Interest on Short-term Loans
In both, the business and private sector, short term loans can be viewed as inherently risky. A person needs capital quickly and doesn’t have access to liquid assets.
For business loan shopping, there are many lenders for short term needs. However, they often carry heavy qualification requirements. Such as minimum assets required and years in business. Interest rates are high and repayment schedules aggressive.
When the average consumer applies for consumer loans with traditional lenders, the requirements are also strict. You will need an excellent credit score. You might also need to be able to show the ability to repay the loan.
For those in a financial bind that necessitates considering this loan type, the requirements often cannot be met. If unemployment or an alternate emergency leads to you needing short-term financing, it still pays to research the possibilities.
Payday Loan Options for Short Term Loans
A payday loan is one of the more common short term loans. It provides a loan in advance of your paycheck with the premise being that you will pay it off when you are paid next.
Payday Loan Pitfalls
The problem with payday loans for some borrowers is the likelihood of renewing the loan week after week. Each time the loan is renewed additional fees accrues, increasing the balance and making it more difficult to pay off.
When the loan is taken out, an initial processing fee is often required. Interest is then added to this processing fee to arrive at the total you must repay the lender by the due date.
After you receive your next paycheck, the loan is due. If you cannot pay the loan in full, the lender will charge a fee for renewing the loan.
Basically, the entire amount is refinanced as a new loan instrument. This means the interest accrued on the initial loan is added to your principal. New interest charges are also added on top of the processing fee.
When you are in a financial bind, it is easy to renew these loans week after week or paycheck after paycheck. The short-term financial crisis you experienced that led to the loan being necessary often can create hardships for repayment.
It is also possible the full cost of the loan equals the full value of your next paycheck. This often makes it impossible to pay off the total without neglecting other bills.
Over time, the processing fees and interest charges add up. If broken down over the cost of frequently renewed short term loans, they often add up to repayment over twice the original loan amount.
This is How Payday Lenders Make a Return on High-risk Short Term Loans
To avoid falling into this trap, avoid taking a higher loan than you need.
Develop a plan to pay back the money as soon as possible and stick to it. Even if you must refinance the loan, you can pay back a lump sum every paycheck. This lowers the balance and reduces the amount subject to additional interest charges.
When a large lump sum isn’t possible, make it a goal to pay back all accrued interest, the refinancing fee and a portion of the balance. This ensures your total is always going down.
Short Term Loans From Local Lenders
The loans may include an abbreviated repayment period. For example six months, or lengthier terms in excess of one year. Like payday loans, short term loans offered by these entities make money through high interest.
Short term loans generally target a low-income demographic with limited access to other financing options with more generous terms. This increases the possibility of default for the creditors. Without charging higher interest rates to those who repay and those who are currently repaying but will default, the enterprises would not be self-sustaining.
Qualifying for Short Term Loans From Direct Lenders
Most short term loans, particularly those offered by chain lenders, have well-established terms. Those will require some form of collateral. For many people, this means allowing the company to place a lien on a paid for vehicle, piece of equipment, or parcel of property.
The collateral provides the lender with some tangible property or asset the lending outfit can attach itself it to for collections. If you default on a personal loan, the collections process would include seizing the item and forcing a sell to cover the terms of the loans.
The qualification will not require the high credit scores other lenders require or a specific debt to income ratio. The repayment of your other debts will be considered heavily. The loan company uses this to determine your likelihood of repaying the debt in a timely fashion.
Paying off Short Term Loans
In addition to collateral, many providers of short term loans will want to connect to your bank account to withdraw monthly or weekly payments. In this scenario, it is possible you will face garnishment of your bank account when you fail to pay.
Whether or not the lender is connected to your bank account, when your account goes into arrears, they can tap it. As part of the collections process, a loan provider can go through the court system to access your bank account or paycheck. The bank account or your checks are then garnished until the terms of the loan of fulfilled.
Benefits of a Short Term Loan
When you possess the ability to quickly repay a short term loan, the instrument is capable of helping you out of a financial bind quickly.
Most payday lenders and small loan providers are skilled in making quick eligibility decisions. Many also provide funds immediately in the form of a bank direct deposit or via check.
For an emergency trip home, imperative dental work or a necessary medical procedure, this option will provide you with the money you need quickly. When time is of the essence, a short term loan for an emergency can get you on track as soon as possible.
As long as you possess the ability to repay the loan quickly, the additional fees will be easily absorbed by your budget. While the cost may be higher than other loan types, convenience may be more important.
How to Find the Best Deal on a Short Term Loan
Do you want to find the best deal on a short term loan when you have the time to research? Firstly, review your credit score and your existing liabilities and income. A credit shop or site with free access to your credit report can help.
When you have a credit score of 640 or above, you are likely to qualify for a range of short term options. Then choose and pick the best one. An even higher score will open the possibility of a long term loan you can spend more time repaying while your cash flow improves.
For scores less than 640, the options start to narrow. However, an established credit history and solid income can help you negotiate with a local lender.
At 600 and under, you are largely looking at short term loan specialists and payday lenders.
Researching Short Term Loan Options
To find the best option for you based on your current financial situation, consider using an online loan aggregator. These sites will take your basic financial information and present a variety of loans, including cash loans online, you could be eligible for.
Many sites will not require a hard pull of your credit report to provide a glimpse of the options. Instead, the individual lender you select will pull your report when you fill out a final application.
Look at the possible interest rates for each loan, the repayment schedule, and what your monthly or weekly payment will be. Pick a loan that provides a low cost of borrowing while keeping payments you can manage until your financial situation improves.
Credit Card Options
If your credit is okay, you may also consider utilizing a credit card as an alternative to a short term loan. While most credit cards maintain high-interest rates, the rates are usually competitive with those charged by short term lenders. They are also better than the higher rates and fees charged by payday lenders and cash loans based on your car’s value.
New credit cards often feature fixed or low-interest rate offers on introductory charges. They also routinely issue checks with promotional financing featuring similar terms.
Utilizing such an option provides you with the repayment flexibility of a long term loan. You can make lower monthly payments while you need to focus on your finances. After you move past your emergency, you can focus on paying the credit card off in full.
A benefit of this is the ability to improve your credit score. And gain access to a larger credit limit capable of helping you out in a future emergency.
Unlike qualifying for a short-term loan, you can keep a credit card you maintain a solid repayment history with for years and use it repeatedly. If you needed another short-term loan in the future, it would be necessary to reapply and meet all of the original terms.
Moving Forward From a Short Term Loan
By actively focusing on paying off a short term loan, you will suffer no financial repercussions for pursuing this option. In fact, a lender who reports your payment history to the credit bureaus can end up boosting your score for the long term.
This means you will qualify for more, better loans in the future. Instead of taking out a short-term loan to fix a clunker car or buy a used vehicle, you may find yourself qualifying for a full auto loan or leasing arrangement.
The key is to use any offer of credit you accept or any loan you take out to build a history of responsible usage. Avoid late payments and added fees, and you will benefit if you use a personal loan wisely.
After you pay off the loan entirely, work on other ways to build up your credit, such as responsible credit card usage, to expand your loan options for the future. Establish a savings account when possible to build a cash fund you can tap when the unexpected happens, and develop a cash flow that will allow you to help others in the future.
Ethan founded Goalry, Inc in Dec 2016 with the mission to build the world’s first and only Financial Goal Mall. One place to reach financial goals and comparison shop for any money matter. Taub invents the IP for the finance stores within the mall, while overseeing various aspects of the company. He also has orchestrated the company’s earned media across the finance stores: Accury®, Billry®, Budgetry®, Debtry®, Cashry®, Creditry®, Loanry®, Taxry® and Wealthry®. This includes over 1200 blogs, 400 videos, thousands of social post and publications that have been featured across the web.