What are short-term loans?

Short-term loans are loans that are typically repaid within a year or less. They are often used to cover unexpected expenses, such as car repairs, medical bills, or home repairs. Short-term loans can also be used to consolidate debt or to finance a short-term investment.

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Tim Yelchaninov

13 min read·Aug 21, 2023

Here are some examples of short-term loans:

Payday loans: Payday loans (such as a $500 loan with no credit check) are short-term loans that are typically repaid within two weeks. They have very high interest rates, so they should only be used as a last resort.
Installment loans: Installment loans are short-term loans that are repaid over a period of several months. They typically have lower interest rates than payday loans, but they still have higher interest rates than other types of loans, such as personal loans.
Personal loans: Personal loans are a type of unsecured loan that can be used for any purpose. They typically have lower interest rates than installment loans, but they may require good credit.
Lines of credit: Lines of credit are a type of revolving credit that can be used for any purpose. They typically have lower interest rates than payday loans and installment loans, but they may require good credit.

Short-term loans can be a convenient way to get quick cash when you need it, but they come with some significant risks. If you're considering a short-term loan, it's important to weigh the pros and cons carefully and make sure that you can afford the payments. There are other, less risky options available, such as personal loans or credit cards.

How do short-term loans work?

Short-term loans typically have a fixed interest rate and a repayment term of a few weeks or months. The borrower receives the money upfront, and then makes monthly payments to the lender until the loan is repaid in full. Short-term loans often have high interest rates, so it is important to make sure that you can afford the payments before you take out a loan.

Here is an example of how a short-term loan might work:

You take out a $1,000 short-term loan with an interest rate of 20% and a repayment term of 3 months.
You will make monthly payments of $333.33 for 3 months.
The total amount of interest you will pay on the loan is $200.

The process of getting a short-term loan typically goes like this:

You apply for the loan online or in person.
The lender will review your application and credit score.
If you are approved, the lender will deposit the money into your bank account.
You will start making monthly payments to the lender.
Once the loan is repaid in full, you are no longer responsible for the debt.

It is important to note that short-term loans can be very expensive. The interest rates are typically much higher than other types of loans, such as personal loans or credit cards. This means that you will pay a lot of money in interest over the life of the loan.

Short-term loans should only be used as a last resort. If you can, it is better to try to find other ways to cover your expenses, such as borrowing money from friends or family, using a credit card, or getting a personal loan with a lower interest rate.

When to consider a short-term loan

Short-term loans can be a good option if you need quick cash to cover an unexpected expense. They can also be a good option if you have bad credit and can't get a loan from a traditional bank. However, it is important to weigh the risks carefully before you take out a short-term loan. The high interest rates and short repayment terms can make it difficult to repay the loan, and you may end up in debt.

Here are some things to consider when deciding whether or not to take out a short-term loan:

The amount of money you need: How much money do you need to borrow? Are you able to afford the monthly payments?
The interest rate: What is the interest rate on the loan? How much interest will you pay over the life of the loan?
The repayment term: How long will it take you to repay the loan? Can you afford the monthly payments?
Your credit score: Do you have good credit? If you have bad credit, you may not be able to qualify for a short-term loan with a low interest rate. Check your score for free with True Finance
Other options: Are there other options available to you? For example, could you borrow money from a friend or family member? Could you use a credit card?

If you decide that a short-term loan is the right option for you, it is important to shop around and compare interest rates from different lenders. You should also make sure that you understand the terms of the loan, including the repayment schedule and any fees that may be associated with the loan.

Here are some of the situations where you may want to consider a short-term loan:

To cover an unexpected expense: If you have an unexpected expense, such as a car repair or medical bill, and you don't have the cash on hand, a short-term loan can be a quick and convenient way to get the money you need.
To consolidate debt: If you have multiple high-interest debts, such as credit card debt or payday loans, a short-term loan can be a way to consolidate all of your debt into one monthly payment. This can make it easier to manage your finances and can save you money on interest.
To finance a short-term investment: If you have a short-term investment opportunity that you think will have a high return, a short-term loan can be a way to finance the investment. However, it is important to make sure that you will be able to repay the loan before the repayment term ends.

It is important to remember that short-term loans should only be used as a last resort. If you can, it is better to try to find other ways to cover your expenses, such as borrowing money from friends or family, using a credit card, or getting a personal loan with a lower interest rate.

Types of short-term loans

There are many different types of short-term loans available, each with its own advantages and disadvantages. Here are some of the most common types of short-term loans:

Payday loans: Payday loans are short-term loans that are typically repaid within two weeks. They have very high interest rates, so they should only be used as a last resort.
Installment loans: Installment loans are short-term loans that are repaid over a period of several months. They typically have lower interest rates than payday loans, but they still have higher interest rates than other types of loans, such as personal loans.
Personal loans: Personal loans are a type of unsecured loan that can be used for any purpose. They typically have lower interest rates than installment loans, but they may require good credit.
Lines of credit: Lines of credit are a type of revolving credit that can be used for any purpose. They typically have lower interest rates than payday loans and installment loans, but they may require good credit.

Here is a table that summarizes the different types of short-term loans:

It is important to compare the different types of short-term loans before you choose one. Consider the interest rate, repayment term, credit score requirement, and any other fees that may be associated with the loan. You should also make sure that you understand the terms of the loan, including the repayment schedule and any penalties for early repayment.

If you have bad credit, you may have a hard time qualifying for a short-term loan with a low interest rate. In this case, you may want to consider a payday loan or a pawnshop loan. However, it is important to remember that these types of loans typically have very high interest rates and fees, so you should only use them as a last resort.

If you have good credit, you may be able to qualify for a personal loan or a line of credit with a lower interest rate. These types of loans are typically a better option than payday loans or pawnshop loans, but they may still have high interest rates.

Benefits of short-term loans

Short-term loans can offer some benefits, including:

Quick access to cash: Short-term loans can provide you with quick access to cash when you need it. This can be helpful if you have an unexpected expense that you need to cover right away.
Easy to qualify: Short-term loans may be easier to qualify for than other types of loans, such as personal loans or credit cards. This is because they often don't require good credit.
No collateral: Short-term loans typically don't require collateral, which means you don't have to put up any assets as security for the loan.

However, it is important to remember that short-term loans also have some drawbacks, including:

High interest rates: Short-term loans typically have very high interest rates. This means that you'll pay a lot of money in interest over the life of the loan.
Short repayment terms: Short-term loans typically have short repayment terms, which can make it difficult to make the payments.
Fees: Short-term loans often come with a variety of fees, such as origination fees, late payment fees, and prepayment penalties. These fees can add up quickly.
Debt trap: If you can't afford to make the payments on your short-term loan, you may end up in a debt trap. This is when you have to take out another loan to pay off the first loan, and then another loan to pay off the second loan, and so on. This can quickly spiral out of control and leave you deeply in debt.

It is important to weigh the pros and cons of short-term loans carefully before you decide to take one out. If you can, it is better to try to find other ways to cover your expenses, such as borrowing money from friends or family, using a credit card, or getting a personal loan with a lower interest rate.

Here are some additional tips for using short-term loans responsibly:

Only take out a short-term loan if you absolutely need the money.
Make sure you can afford the monthly payments.
Read the terms of the loan carefully and understand all of the fees.
Repay the loan as quickly as possible to save money on interest.
Avoid taking out multiple short-term loans at the same time.
If you are struggling to make the payments, contact the lender and see if they can work with you to create a payment plan.

What is a personal loan?

A personal loan is a type of unsecured loan that can be used for a variety of purposes, such as consolidating debt, paying for unexpected expenses, or making home improvements. Personal loans typically have fixed interest rates and monthly payments, which makes them easier to budget for than other types of loans, such as payday loans or credit cards.

How do personal loans work?

To get a personal loan, you will need to apply to a lender and provide information about your income, expenses, and credit history. If you are approved for the loan, you will receive the money in a lump sum. You will then repay the loan over a set period of time, with interest.

How are personal loans superior to payday loans and installment loans?

Personal loans are superior to payday loans and installment loans in a number of ways:

Lower interest rates: Personal loans typically have lower interest rates than payday loans. This is because payday loans are considered to be high-risk loans, as borrowers are more likely to default on them.
Longer repayment terms: Personal loans typically have longer repayment terms than payday loans. This gives borrowers more time to repay the loan, which can make it easier to afford the monthly payments.
No collateral required: Personal loans do not require collateral, such as a car or a house. This means that borrowers do not have to risk losing their assets if they are unable to repay the loan.
Better credit building: Personal loans can help borrowers build their credit history. When you make on-time payments on a personal loan, it will show lenders that you are a responsible borrower. This can help you qualify for lower interest rates on future loans.

If you are considering taking out a loan, a personal loan is a good option to consider. Personal loans offer lower interest rates, longer repayment terms, and no collateral requirements. They can also help you build your credit history.

Here are some additional benefits of personal loans:

Flexibility: Personal loans can be used for any purpose, so you have the flexibility to use the money for whatever you need it for.
Convenience: Personal loans can be applied for and funded quickly, so you can get the money you need when you need it.
Transparency: Personal loans typically have clear terms and conditions, so you know exactly what you are getting into before you sign the dotted line.

If you are looking for a safe and affordable way to borrow money, a personal loan is a good option to consider.

Alternatives to short-term loans

If you need quick cash, there are other, more affordable options available to you. Here are some alternatives to short-term loans:

Borrow money from friends or family: This is often the best option, as you will not have to pay any interest or fees. However, it is important to make sure that you can afford to repay the loan. You don't want to put a strain on your relationships.
Use a credit card: If you have good credit, you may be able to use a credit card to cover your expenses. However, make sure you pay off the balance in full each month to avoid interest charges. If you can't pay off the balance in full, you will be charged interest on the outstanding balance. This can add up quickly, so it's important to be careful.
Get a personal loan: Personal loans typically have lower interest rates than short-term loans. However, you will need to have good credit to qualify for a personal loan. You can apply for a personal loan through a bank or credit union.
Get a line of credit: A line of credit is a revolving credit account that you can use as needed. Lines of credit typically have lower interest rates than short-term loans, and you can only borrow what you need. You can apply for a line of credit through a bank or credit union.

It is important to weigh all of your options carefully before you decide to take out a short-term loan. If you can avoid it, short-term loans should be your last resort.

Here are some additional tips for finding alternative sources of quick cash:

Shop around for the best interest rates and terms: Compare rates from different lenders before you decide which one to go with.
Read the fine print: Make sure you understand all of the terms of the loan before you sign anything.
Be prepared to provide documentation: The lender will likely ask you to provide proof of income and other financial information.
Ask about repayment options: Some lenders may offer flexible repayment terms, such as the ability to make biweekly payments.
Be prepared to negotiate: If you have good credit, you may be able to negotiate a lower interest rate or better terms.

It is important to remember that there is no one-size-fits-all solution when it comes to finding quick cash. The best option for you will depend on your individual circumstances. Do your research and compare your options carefully before you make a decision.

The bottom line

Short-term loans can be a convenient way to get quick cash, but they should only be used as a last resort. They typically have very high interest rates and fees, which can make them expensive to repay. If you can avoid it, short-term loans should be your last resort.

Here are some tips for avoiding short-term loans:

Save up an emergency fund: This will give you a cushion of cash to cover unexpected expenses without having to take out a loan.
Borrow money from friends or family: This is often the best option, as you will not have to pay any interest or fees.
Use a credit card: If you have good credit, you may be able to use a credit card to cover your expenses. However, make sure you pay off the balance in full each month to avoid interest charges.
Get a personal loan: Personal loans typically have lower interest rates than short-term loans. However, you will need to have good credit to qualify for a personal loan.
Get a line of credit: A line of credit is a revolving credit account that you can use as needed. Lines of credit typically have lower interest rates than short-term loans, and you can only borrow what you need.

If you do need to take out a short-term loan, be sure to:

Shop around for the best interest rates and terms: Compare rates from different lenders before you decide which one to go with.
Read the fine print: Make sure you understand all of the terms of the loan before you sign anything.
Be prepared to repay the loan as quickly as possible: This will help you save money on interest.
Avoid taking out multiple short-term loans at the same time: This can quickly get you into debt.
If you are struggling to make the payments, contact the lender and see if they can work with you to create a payment plan.

Taking out a short-term loan can be a risky decision. It is important to weigh the pros and cons carefully before you decide to do it.