When you need a few hundred bucks fast to cover your emergency, a short-term loan can often be the easiest solution. This is one broad category for small financing obtained from a bank, a credit union or a lending provider.
The National Credit Union Administration designed several types of short-term programs to allow different lenders greater flexibility in providing alternative sources to traditional loans. Unlike the regular ones, term loans with short maturities come with less interest over the entire period and have higher monthly installments.
When applying for them, one key aspect to keep in mind is that the longer you make payments, the more you are paying on your allowance. This can easily result in paying more for the finance charges than you borrowed first.
In this paper, we will shed light on some of the most common types of short-term loans to help you understand which one can be good for you.
What is a Short-Term Small-Amount Loan?
This is one broad category of financing combining the ones that have a repayment period of one year or less. So, during that time, they need to be repaid to the provider in full.
Loans with short maturity terms can help a customer meet an immediate need for cash – typically $1,000 or less – without requiring them to apply for a traditional loan with lasting commitment.
With that being said, because of their short-term nature, the finance charges, when translated to an APR, often make them the costliest form of borrowing. This means that there is a necessity to pay more for speed and convenience.
Let’s take a look at these most common types separately because each one can be beneficial to different customers.
Payday Loan
A payday loan is one of the most popular short-term financing sources that borrowers promise to pay off from their next payroll. They have the highest interest rates and fees since they use no collateral to make the allowances. Customers who are unable to repay the fees on the due date are often forced to roll over the debts and can easily be trapped in a recurring cycle.
Who Is This Best For?
As long as you know how much you pay and for how long, this could be a smart option. Consider if you can afford monthly installments before taking out any payday loan.
Pros: easy to access; fast transactions; available for all types of credits.
Cons: not ideal for borrowers with low income; expensive to pay off; not positive effect on credit history for those who fall behind with a repayment plan.
Auto Title
Typically, auto titles are considered short-term, though they come in several different terms between 24 and 72 months. The major difference between payday loans is the collateral pledge (your vehicle) you will need to put for this type of allowance.
As for the terms, you need to keep in mind that the longer you make repayments, the more you pay for your vehicle. Eventually, you could end up paying more for the auto than you negotiated with the lender.
Who Is This Best For?
They may be smart if you want to get lower APRs and simplify the qualifying process. Make sure the monthly payments fit your budget before agreeing to the auto titles terms.
Cons: risk of losing the car; excessive fees that are often hidden in the fine print of contracts.
Pawnshop Loan
Similar to auto titles, pawnshop loans are secured short-term allowances. Instead of your vehicle though, you need to bring valuables such as jewelry or gears to pledge as collateral until you repay the borrowing amount. The scheme is standard: if you don’t make regular payments, the pawnshop may sell your valuables to somebody else.
Who Is This Best For?
If you have low income and/or existing debt and are looking for an affordable and quick way to get the cash you need, a pawnshop loan may be a good choice. You don’t need a certain FICO score or income to qualify. The lender makes a decision based on the value of your collateral pledge.
Pros: no credit requirements; approval in a matter of hours; relatively lower APR; optional repayment periods.
Cons: small amounts; risk of losing the collateral pledge; high borrowing costs; excessive processing or storage fees.
Some Final Thoughts
It is not hard to see that short-term loans can be exorbitant in cost. A typical two-week allowance with a $15 finance charge for every $100 borrowed will result in a yearly interest rate of close to 400%. However, each customer has a different situation and different circumstances. Thus, term financing with a short nature can certainly be a one-time opportunity in an emergency.
Because of their high-interest rates, it would be smart to not stretch short-term allowances for too long. Conversely, try to pay them off as early as possible. Also, keep in mind that budgeting properly can be a life-changer for your future. Choosing the right borrowing length and term will help keep control of your finances down the road.
When you need a few hundred bucks fast to cover your emergency, a short-term loan can often be the easiest solution. This is one broad category for small financing obtained from a bank, a credit union or a lending provider.
The National Credit Union Administration designed several types of short-term programs to allow different lenders greater flexibility in providing alternative sources to traditional loans. Unlike the regular ones, term loans with short maturities come with less interest over the entire period and have higher monthly installments.
When applying for them, one key aspect to keep in mind is that the longer you make payments, the more you are paying on your allowance. This can easily result in paying more for the finance charges than you borrowed first.
In this paper, we will shed light on some of the most common types of short-term loans to help you understand which one can be good for you.
What is a Short-Term Small-Amount Loan?
This is one broad category of financing combining the ones that have a repayment period of one year or less. So, during that time, they need to be repaid to the provider in full.
Loans with short maturity terms can help a customer meet an immediate need for cash – typically $1,000 or less – without requiring them to apply for a traditional loan with lasting commitment.
With that being said, because of their short-term nature, the finance charges, when translated to an APR, often make them the costliest form of borrowing. This means that there is a necessity to pay more for speed and convenience.
Types of short-term loans include but are not limited to:
Let’s take a look at these most common types separately because each one can be beneficial to different customers.
Payday Loan
A payday loan is one of the most popular short-term financing sources that borrowers promise to pay off from their next payroll. They have the highest interest rates and fees since they use no collateral to make the allowances. Customers who are unable to repay the fees on the due date are often forced to roll over the debts and can easily be trapped in a recurring cycle.
Who Is This Best For?
As long as you know how much you pay and for how long, this could be a smart option. Consider if you can afford monthly installments before taking out any payday loan.
Pros: easy to access; fast transactions; available for all types of credits.
Cons: not ideal for borrowers with low income; expensive to pay off; not positive effect on credit history for those who fall behind with a repayment plan.
Auto Title
Typically, auto titles are considered short-term, though they come in several different terms between 24 and 72 months. The major difference between payday loans is the collateral pledge (your vehicle) you will need to put for this type of allowance.
As for the terms, you need to keep in mind that the longer you make repayments, the more you pay for your vehicle. Eventually, you could end up paying more for the auto than you negotiated with the lender.
Who Is This Best For?
They may be smart if you want to get lower APRs and simplify the qualifying process. Make sure the monthly payments fit your budget before agreeing to the auto titles terms.
Pros: credit-building tool; immediate funding; lowered interest rates; driven reputable plan options available.
Cons: risk of losing the car; excessive fees that are often hidden in the fine print of contracts.
Pawnshop Loan
Similar to auto titles, pawnshop loans are secured short-term allowances. Instead of your vehicle though, you need to bring valuables such as jewelry or gears to pledge as collateral until you repay the borrowing amount. The scheme is standard: if you don’t make regular payments, the pawnshop may sell your valuables to somebody else.
Who Is This Best For?
If you have low income and/or existing debt and are looking for an affordable and quick way to get the cash you need, a pawnshop loan may be a good choice. You don’t need a certain FICO score or income to qualify. The lender makes a decision based on the value of your collateral pledge.
Pros: no credit requirements; approval in a matter of hours; relatively lower APR; optional repayment periods.
Cons: small amounts; risk of losing the collateral pledge; high borrowing costs; excessive processing or storage fees.
Some Final Thoughts
It is not hard to see that short-term loans can be exorbitant in cost. A typical two-week allowance with a $15 finance charge for every $100 borrowed will result in a yearly interest rate of close to 400%. However, each customer has a different situation and different circumstances. Thus, term financing with a short nature can certainly be a one-time opportunity in an emergency.
Because of their high-interest rates, it would be smart to not stretch short-term allowances for too long. Conversely, try to pay them off as early as possible. Also, keep in mind that budgeting properly can be a life-changer for your future. Choosing the right borrowing length and term will help keep control of your finances down the road.
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