What are Short Term Loans?
Short-term loans are simply loans that must be repaid over a period of months, with a fixed term that is typically less than 1 year. The loan amount and interest rate varies, but generally, short-term loans are taken out during emergencies and cost much more than longer-term loans.
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Types of Short-Term Loan
All short-term loans will move money into your bank account in less than a day, after which it is yours to do with as you please. The type of loan you choose, however, will dictate how much you get, what sort of terms you’re offered and whether or not your activity is reported to the credit bureaus.
A payday loan is designed to cover you until payday and the lender may ask you to sign a post-dated check. You will pay a fixed amount of interest on that loan, but if you won’t have the money after all, you can roll it over until the next month for a fee.
These loans can be crippling, and payday loans have a default rate as high as 50%. In fact, many states have banned them, while others have placed severe restrictions on how many times they can be rolled over.
Payday loan lenders have been criticized for predatory behavior as the majority of users are heavily in debt already, with little to no income and really bad credit. They charge an astronomical annual percentage rate to make up for the many defaults and if you don’t make your loan payments on time, this APR will be very costly.
Merchant Cash Advance
A merchant cash advance is a business loan that exchanges a lump sum payment for a regular commission on sales. For instance, you may be offered a loan of $10,000 to help meet business expenses, and you only have to repay this loan when you earn money from the sale of products and services.
These short-term business loans can be used to help small companies dig themselves out of financial difficulty and avoid defaulting on bigger debts and more demanding creditors.
Online Installment Loans
An online loan is a quick, easy, and small loan offered by online-only lenders. These lenders don’t operate brick-and-mortar businesses, which helps to keep overheads low, allowing them to pass the savings onto the borrower.
There are many types of online loan, including payday loans, which we discussed above, and lending circles, where groups of borrowers lend to one another to improve credit scores.
Credit builder loans can also fall into this category. These loans are designed purely to help you build credit. In many ways, they work like traditional loans, only the lender keeps the money, reports activity, and then releases the cash at the end of the term.
Peer to Peer Loans
Peer to peer networks like crowdfunding have breathed life into the gaming industry and helped countless charities to get the support they need, but they have also helped businesses and individuals to get low-interest rates on essential loans.
With these loans, people who have money give it to people who don’t in exchange for a low-interest rate. The lenders are just normal people, and in exchange for their generosity, they get a higher rate of return than they would get from a savings account. As for the borrowers, they get lower interest rates than they would get from a traditional lender.
You can get small business loans, short-term loans, long-term loans, and pretty much anything else you need, all with a suitable repayment period.
PayPal is a merchant service that offers loans for consumers and business owners, which means these loans fit into the categories outlined above. However, they offer many more benefits and are deserving of a category all of their own.
The first of these is PayPal Credit, which offers a fixed sum of money and can be used for online purchases. If you have a PayPal account, you can use PayPal Credit to pay for Christmas presents, Birthday presents, and other large purchases.
The rates and loan terms differ from user to user, but they are often tied to your PayPal account and provide benefits such as 0% interest for the first few months. And the best thing about PayPal credit is that each purchase is treated as a separate loan but doesn’t incur additional fees, won’t add any extra credit lines on your credit report, and has its own introductory rate.
For instance, if you buy a computer today for $1,000, you may be offered a 0% APR for the first four months. Providing you repay the $1,000 in that time, you won’t pay any interest. If you make a second purchase after this term, the process will repeat, and you’ll have several months to repay it in full and avoid accumulating interest.
Next up is PayPal Working Capital. This loan is based entirely on your PayPal account and is offered to all business account holders in specific regions. The amount you can borrow depends entirely on how much money is paid into your account every month. You are charged a small fee for acquiring this loan and that fee is added to your total.
Working Capital is repaid with between 10% and 30% of every penny that you earn and requires a minimum of 10% of the total balance to be repaid every 90-days. The higher the loan repayment percentage is, the cheaper the fee will be.
For instance, if you take out a $10,000 loan with a 20% payment, you may be charged a fee of $500, increasing the total to $10,500. After a grace period of just a few days, 20% will be taken from every penny you earn and used to clear this balance. You need to repay at least $1,050 every 90 days to meet your terms.
Pros and Cons for Short-Term Loans
Short-term loans exist for a reason and while they generally offer worse terms, they do have some advantages over long-term loans. As with anything, it’s a balancing act; you need to weigh up the pros and cons to see which one is better for you.
Pro: Fast Approvals
Short-term loans are designed to give you quick access to cash. Some of the options outlined above can give you money in just a few minutes; others will give you the funds you need in less than 24-hours. Most loans are quick these days, but short-term loans are typically much faster than traditional loans.
Pro: Pay Less Interest
While short-term loans typically have higher interest rates, they also have much shorter terms, which means you may pay much less over the life of the loan. Of course, that only applies if you actually meet your monthly payments on time, otherwise, you could be hit with late fees, penalty rates, and other issues, all of which drive up the cost of that short-term personal loan.
Pro: Quickly Improve Your Credit Score
Many short-term loans won’t report to the credit bureaus unless you miss a payment, in which case you’ll be hit with a negative mark. However, this isn’t true for all of them and the size and simplicity of these loans makes them an ideal choice when you need a settled account to appear on your credit report.
Pro: Easier to Acquire
Short-term loans are generally easier to acquire than other types of loan, which makes them a great choice for borrowers with low credit scores. If you’re in dire need of a cash injection before your next paycheck, they’re ideal, dropping a small sum into your checking account that will see you through for the next few weeks or months.
Con: Dire Consequences
If you fail to repay the loan by the due date, you could face serious consequences, including higher interest rates and fees. This will increase your balance further, making it more difficult to repay the next month. Thankfully, there are limits to how much a short-term lender can charge you, but you can still get into a lot of trouble financially before those limits are reached.
Cons: Small Amounts
Short-term loans are generally limited to just a few thousand dollars and some may offer you a few hundred. There are exceptions, including larger amounts acquired through the PayPal Working Capital program. But the irony here is that larger amounts will extend the length of time it takes to repay the loan, effectively turning it into a long-term loan.
What are Short-Term Loans Used for?
Short-term loans are often used by bad credit borrowers to gain access to quick cash, which they can use for emergency purposes and unexpected expenses, including:
- Debt Repayment: It’s rarely a good idea to use a short-term loan to pay off another loan as it’s a cycle that may never end. But if a lender is making demands and you don’t have the money to pay them, it’s an option worth considering.
- Work/School: A short-term loan isn’t just about securing some cash before your payday. It could also be used to help you make a trip for school or work or pay for essential educational materials.
- Car Repair: This is one of the most common reasons people apply for short-term loans. If your car breaks down, you don’t have the money to fix it, but if you need it for work, you may feel like you don’t have any other option.
- Home Repair: Leaky roofs, broken windows, mold—if you need to fix serious problems in your home then a short-term loan can help. Generally, homeowners have more collateral and therefore better options, but if you only need a few hundred bucks there’s no point looking into equity loans and other secured debts.
A Night Out: Many younger consumers are using payday loans to pay for nights out, covering everything from a Valentine’s Day meal for themselves and their loved ones, to a night at the bars and clubs with friends.