Who among us doesn’t go through a cash shortage, even though it’s just once in a while? I am just getting out of this situation myself after making a purchase that I couldn’t do without, but that literally left me with pocket change. I had no idea how I was going to pay my bills and other obligations. An interim loan is what got me out of the hole. Let’s explore why you should go for short-term loans when strapped for cash.

What is a short-term loan?

The loan derives its name from the brief payment period that characterizes by the loan. It must be paid within between six and twelve months. This is a loan acquired to fulfill a brief personal or business financial need. Just like a long-term loan, it has a principal amount and interest that should be paid back along the way until the maturity date. A short-term loan is appropriate for solving temporary monetary difficulties. It can range in amount from as little as one hundred dollars to as much as one million dollars.

Short-term loan requirements

Before a lender gives you a short-term loan, you have to provide them with the necessary paperwork. They will want to see evidence of your income and a history of on-time payments; some lenders will need collateral depending on the amount you need.

Advantages of short-term loans

•    Less interest

Because the repayment period of these loans is short, the interest paid will also be less compared to long-term loans.

•    It can boost your credit score

A short term loan repaid on time will help improve your credit rating because it demonstrates to other lenders that you are trustworthy.

•    Quick approval

Some short term loans can be applied for online and are processed quickly. You access the funds in hours or a few days, and being able to do this comes in handy when you need the cash urgently.

•    No security needed for personal loans

Unlike long-term loans, most short-term loans do not require collateral, making easier to obtain.

•    Your credit score doesn’t matter

Short-term lenders do not consider your credit score when giving you a loan, and this gives a leeway for people with poor credit to access the money as well.

Disadvantages of short-term loans

•    High-interest rates and fees

Because they are not secured, a short-term loan comes with higher interest rates and fees compared to long-term loans.

•    Late payment affects your credit score

In case you are late paying off the loan, your credit score will be affected negatively, hurting your chances of future loans with other lenders.

•    The risk of getting into debt

Getting a short-term loan indicates you are having financial problems. If you can’t pay that loan, too, it means you get deeper in debt according to suggestion from justrightloans.com. You might then find yourself going for another short-term debt from a different lender and get yourself into a cycle of debt.

Types of short term loans

•    Payday loan

These are loans that are so easy to get, and even street lenders give them. They are called payday because the principal and interest must be paid simultaneously, on the borrower’s payday.

•    Invoice Financing

This is a short-term loan given based on unpaid invoices from your business clients. You will need to have the invoices for sold goods and services, creditworthy customers, and have no liens. The two types are called factoring or discounting invoice financing.

Invoice finance factoring

The financier gives you the loan, and interest accrues for as long as the invoices are unpaid. Once the customers pay the invoices, the lender takes his amount plus the interest on the loan and gives the borrower the balance.

Invoice finance discounting

The borrower collects the invoice amounts from clients and pays the lender without interest or any fees.

•    Line of credit

A line of credit is a preset credit given based on the borrower’s creditworthiness. The higher your credit score, the higher the amount of loan you get. In this short-term loan arrangement, charges are incurred only for the amount taken, but not the whole amount you qualify for. You could have a credit limit of $10,000 but need a loan for only 1,000, as an example. The interest rates are fixed, and they only change if the borrower defaults or pays late. Once the loan is paid in full, the borrower will still have the same predetermined line of credit amount as before. This continues and can go on until either the lender or borrower decides to close the line of credit.

•    Bank Overdraft

This is a short-term loan given to borrowers who are account holders with the lending bank. The borrower has access to more cash than what they have in their account. The bank earns interest on the amount the borrower draws. Similarly, some banks charge daily fees on the overdraft amount as well as a fixed overdraft facilitation fee. The amount of overdraft given and interested charged are determined by factors such as your credit score, collateral provided, age, bank policy, income, how long you have been an account holder, etc.

•    Merchant cash advances

A merchant cash advance is given to businesses that accept credit cards, in contrast to cash. The loan issued depends on the credit sales the business makes, and no collateral is needed. The lender gives a lump sum amount to the borrower and then recovers it from sales on a daily or weekly basis.

•    Short-term bank loan

This is a loan from the bank that is repayable within a short time. It has a fixed repayment period, and when it has been paid in full, the borrower will have to apply again if he or she needs another loan, which means that further loans are independent of the first one.

Main Takeaways

Do not suffer a cash shortage in silence when there is a way to get temporary relief. Don’t shy away from going for a short-term loan when you are strapped for cash. It can help you repay a loan that is due, improve your credit score, give a much-needed boost for your business, or even help you pay pending personal bills. Don’t forget to pay your loan on time to boost future borrowing potential.