What Are Short-Term Loans? How They Work
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
What Is a Short-Term Loan?
Types of Short-Term Loans
Bank Overdraft
Car Title Loan
Invoice Financing
Lines of Credit
Merchant Cash Advance
Payday Loan
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
Personal Loan
The Takeaway
About the Author
Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
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