Short-Term Loans: Know All Your Options

A “short-term loan” is a type of unsecured financing that uses a relatively short repayment period – less than 2 years and perhaps just several months or even just several weeks. Even though short-term loans don’t require collateral, lenders may still have less strict income and/or credit score requirements than with a longer-term, secured loan requiring collateral.

While multiple types of financing can be used, a short-term loan refers to a personal loan in most cases. Short-term personal loans use a shorter repayment period than the more common personal loan term of 24 to 60 months.

Personal loans are a type of installment loan. That means the borrower receives a lump sum that’s repaid with a fixed monthly payment over the course of the loan’s term. Personal loans are usually unsecured, meaning they don’t require collateral. While most personal loans are repaid over 2 – 5 years, short-term personal loans have repayment terms of less than 2 years as likewise noted earlier.

Short-term personal loans may use a lower interest rate but have higher penalty fees and a smaller loan amount than longer-term, traditional personal loans like one you may get from Rocket LoansSM. The lower interest rate on a short-term loan is likely because the lender is facing less risk since the repayment will be made over a shorter period of time.

However, a lender might combine a modestly low interest rate with higher fees to actually create a higher annual percentage rate (APR). Or the lender could charge a higher interest rate to help offset the cost of creating the loan or the risk of not requiring collateral. Either way, make sure you understand your loan’s rate and terms before taking on the payment.

As easy as it may sound to get a short-term loan, there are some significant considerations to take into account before inking a contractual agreement that could determine your financial security.

Next, let’s review some pros and cons of short-term loans.

Pros

• Easier eligibility requirements: While larger-sum, longer-term loans require a good to excellent credit score to qualify, a bad credit history isn’t an automatic disqualification for some forms of short-term lending.
• Fast payout: You could be approved and receive your loan in your checking account by the next business day, depending on the lender you choose. When paying off medical bills or consolidating debt, you can experience relief fairly quickly.
• Varied repayment options: Short-term loans have more flexible and varied repayment options, so it’s important to pay close attention to the terms and conditions. The biggest pro of repaying a small loan is that you’ll be debt-free sooner rather than later.
• Lower interest rates, in some cases: Since short-term loans are repaid over a shorter period of time, many lenders will offer more competitive rates. However, this usually only applies to installment loans and isn’t always the case.

Cons

• Steep penalties and fees: Some lenders may charge origination fees, late fees and prepayment penalties. To avoid these costs and entering a never-ending debt cycle, it’s vital that you read the terms and conditions carefully. Be certain you can pay back the loan sum on time without missing a payment.
• Higher APRs: In many cases, a higher interest rate will accompany a longer-term loan and larger loan amount, but some short-term loans have high APRs. For example, payday loans can have an APR as high as 400%.
• Lack of credit building: Taking out a short-term personal loan likely won’t build your credit. In fact, if you miss a payment or fail to repay your loan by the end of the term, it will damage your FICO® Score and remain on your credit report for years.
• A lingering debt cycle: One of the most common issues that short-term borrowers face is a never-ending cycle of debt, which often makes their initial debt worse. This is because the underlying cause of their debt goes unaddressed, which can leave borrowers feeling trapped and out of control.

Discover more about short-term loans with the answers to these common questions.

What is a short-term personal loan?

A short-term personal loan is a personal loan that offers a relatively short repayment period of less than 2 years. These loans also come with a smaller loan limit than a standard personal loan.

How can I get a short-term loan?

You can apply for a short-term personal loan by submitting an application online through the lender’s website, over the phone with a representative, or in-person at a bricks-and-mortar location.

Where can I get a short-term personal loan?

The lenders that most commonly offer short-term personal loans are traditional banks, online lending platforms and credit unions. Begin your research by reviewing loan offers from your bricks-and-mortar bank and compare them against your local credit unions while also investigating offers from online lenders.

What are the alternatives to a short-term personal loan?

If you’ve decided you don’t want to use a short-term personal loan, a few alternatives may be worth considering. These include:

• Using your home equity: Tapping into the equity in your home can be a wise financial decision for borrowing money in the short term. You can utilize a home equity loan or a home equity line of credit (HELOC) to access the funds you need.
• Borrowing from friends or family members: If you’re strapped for cash and need temporary financial assistance, consider asking friends or family members for a short-term loan. Be sure to address repayment expectations upfront to avoid potentially straining a relationship.
• Applying for a traditional personal loan: If you need a loan worth several thousand dollars or more, a traditional personal loan may be your best option.

Can I pay off a short-term personal loan early?

Yes, you can usually pay off a personal loan early. However, some lenders may charge a prepayment penalty. Be sure to read your paperwork carefully before sending in your final payment.

Although a short-term personal loan may seem like a great way to access cash quickly in your time of need, it’s important to consider the benefits and risks associated with this type of borrowing. While a short-term loan may provide temporary help, it could put you in a worse financial situation for the future.

If you’ve decided a short-term loan isn’t right for you, consider applying for a longer-term personal loan, which can offer you a lengthier payback time.