What Are Short-Term Loans? How They Work
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What Is a Short-Term Loan?
Types of Short-Term Loans
Car Title Loan
Lines of Credit
Merchant Cash Advance
Working Capital Loan
Are All Personal Loans Short-Term Loans?
What Are Short-Term Loans Typically Used For?
Factors That Lenders Consider in Determining Short-Term Loan Application Approval
Credit score Credit report Monthly or yearly income Debt-to-income ratio (DTI) Employment history Value of collateral (if needed)
Advantages and Disadvantages of Taking Out Short-Term Loans
Advantages of a Short-Term Loan
Easy to qualify for: Compared to long-term loans, it can be easier to qualify for a short-term loan than a long-term loan. While there are eligibility requirements each borrower must meet, these requirements are sometimes more relaxed because the lender will make a profit through fees and interest. Fast funding period: After you have applied and been approved, it’s not uncommon to receive funds within a few business days or less (sometimes even the same day).
Disadvantages of a Short-Term Loan
Short repayment period: Borrowers don’t have long to pay back borrowed funds. Repayment periods can be as little as a few months or even weeks. This can sometimes create an ongoing cycle of debt. More expensive than a long-term loan: With a long-term loan, a shorter repayment period would usually mean lower interest rates. However, because of the easy qualification process, interest rates remain high with short-term loans, making them more expensive than long-term loans in most cases. Smaller loan amounts for most borrowers: Most borrowers seeking a short-term loan will not be able to borrow as much as they would with a long-term loan. Businesses with excellent credit may be able to make frequent use of short-term loans at increased borrowing amounts and lower interest rates.
What Are Some Alternatives to Short-Term Loans?
Promotional Periods on Credit Cards
Home Equity Loan or Line of Credit
Asking Friends or Family
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