Financial emergencies are almost always unpredictable. These can strike anyone at any time without warning. The situation could be even worse if they strike and you don’t have sufficient personal finance to take care of the emergency. Thankfully, with the availability of short-term loans, you can manage the situation relatively quick.

Borrowing money from friends or family could be tough especially when you need quick cash to cover an emergency expense. A short-term personal loan could be the answer in such situations. A short-term personal loan is generally an unsecured loan available to anyone with a regular income source.

How Does a Short-Term Loan Work?

In case of a traditional loan, you can have the flexibility to pay back over several years. However, when it comes to a short-term loan, you need to generally repay it within a year. Some of the short-term loans may require repayment within a couple of weeks depending on the type of loan. The type of short-term loan you are eligible for depends on each borrower’s creditworthiness and also the lender. Here is how a short-term personal loan works.

  1. Short term loans can be sourced either online or from an offline lender by making an application.

  2. Lenders perform credit and background verification and seek relevant documentation for evaluating the applicant’s financial history.

  3. After verification, if the lender is satisfied with the applicant’s credit history then loan request is approved. In such cases, a loan offer is made with attached terms and conditions. Short-term loan applications and processing do not take much time and are one of the quickest to be approved.

  4. Once the applicant agrees to the terms and conditions of the loan the lender transfers money to the applicant’s bank account. Sometimes it could take as little as 24 hours to approve and process these loans.

Types of Short-Term Loans

Some of the common short-term loans include:

  1. Merchant cash advances: This short-term loan is a cash advance that operates as a loan. Under this loan, the lender loans the amount needed by the borrower. The borrower makes the loan payments by allowing the lender to assess the borrower’s credit facility. Each time a customer makes a purchase from the borrower a certain percentage of the sale is taken by the lender.

  2. Lines of credit: A line of credit is similar to using a business credit card. Under this type of short-term loan, a credit limit is set and the business is able to tap into the line of credit as required. The business has to make monthly instalment payments against the amount borrowed. Therefore, monthly payments could vary depending on how much of the line of credit has been accessed. One advantage of lines of credit over business credit cards is that the former typically charge lower Annual Percentage Rates (APRs).

  3. Payday loans: These are emergency short-term loans that are relatively easy to obtain. Repayments are done by taking out the pre-decided amount from the borrower’s bank account, using the continuous payment authority. The drawback is that the entire loan amount, along with interest, must be paid in one lump sum when the borrower’s payday arrives.

  4. Invoice financing: This type of loan involves using a business’ accounts receivables which mainly comprises of invoices that are due to be paid by customers. The lender loans the money and charges interest based on the number of weeks that invoices remain outstanding. When an invoice gets paid, the lender will interrupt the payment of the invoice and take the interest charged on the loan before returning to the borrower what is due to the business.

  5. Online or Instalment loans: Online short-term loans are very easy to get since everything is done online, right from application to approval. It is one of the most convenient loan options because, within minutes of getting the loan approval, the money is wired to the borrower’s bank account.

Additional Reading: Explore the Various Forms of Long Term and Short Term Personal Loans

Benefits of Short-Term Loans

Some of the advantages or benefits of short-term loans include:

  1. Limited Interest: Since short-term loans need to be paid off within a very short time period, usually a year, there are lower interest payments required. Compared to long term loans that take many years to mature, interest paid on short term loans is significantly less.

  2. Immediate Funding: Short term loans can be sourced much faster because of the lesser time taken for underwriting by lenders. Thus, the borrower can obtain the needed funds more quickly by opting for short-term loans.

  3. Easier to acquire: Short term loans are very beneficial for smaller businesses or individuals who have average or poor credit scores. This is because the requirements for such loans are generally easier to meet.

Additional Reading: What is Short term Loans - Features & Eligibility Criteria

Factors Impacting Short-Term Loans

Here are some of the important aspects to consider before applying for a short-term loan.

  1. Interest Rates: Some of the short-term loans may come with significantly higher interest rates because they may not require any collateral. These are therefore riskier and also costlier as compared to traditional bank loans.

  2. Personal Loans: Short-term personal loans could have an impact on your credit score. This is because personal loans may involve a thorough due-diligence as far as credit history is concerned. Also, any kind of late payment in such loans could have a significant negative impact on the credit score.

  3. Repayments: Some of the short-term loans, especially for businesses, could require daily repayments and may affect the business’s cash flow. If these are unpaid even for a single day, there could be a significant impact on the interest accumulation. Hence, it is important to have sufficient cushion to look after the repayments.

  4. Unreliable Customers: For businesses which are going for short-term loans such as invoice financing, there could be issues arising due to problem customers who do not make payments on time. This, in turn, impacts the repayment and thereby interest component.

How to Apply for Short-Term Loans

Here are some of the steps which can be followed while applying for a short-term loan.

  1. Credit Score: First and foremost, ensure that you have verified and checked your credit score before applying for a short-term loan. This is especially helpful when you are looking for a short-term personal loan. Credit scores need to be sourced from reliable sources. Credit Mantri is one such option where you can ensure to get end-to-end service as far as credit rating is concerned. Once you know your credit score, you can easily bargain around the interest rates with various lenders.

  2. Exploring Lender Options: Make sure that you carry out a good amount of research around lenders to get the best terms and conditions for your loan. It makes sense to opt for a reputed lender even if interest rates are slightly higher. You can also check for online reviews on lenders to ensure that you get the best terms and conditions on your loan.

  3. Arrange Documentation: After contacting a good lender, make sure to start arranging for the necessary documentation to have smoother processing. You will need to ensure that all the financial and personal documents are in place before the process begins.

  4. Application and Approval: Short-term loans do not require much time for getting approval as long as the application process is carried out smoothly by submitting the right documents. Some of the lenders take as little as a day to approve such loans and ensure quick funds are made available to the applicant.

Additional Reading: Why short term loans are cheaper than long term loans?

End Note

When you are in dire need of finances, be it for your business or personal requirements, short-term loans can come in handy and are easily available. A lot depends on how you maintain your credit score, especially when it comes to interest rate and other terms and conditions of the loan. While short-term loans can meet your immediate financing requirements, you also need to ensure that your credit score is maintained at reasonable levels. You can check your credit score at CreditMantri to avail some of the best rates and offers on short-term loans.