A short-term loan is a loan that can be used for businesses and sudden personal financial issues. As with other loans, this loan also includes repaying the loaned amount and interest within a specified period.
Usually, the repay period lasts from 6 months to 18 months max. However, the method of repayment of short-term loans differs from other loans. Instead of repaying every month, the borrowers repay daily or weekly. Before you apply for the short term loan, there are some factors you should consider, such as:
- Annual percentage rate
- Fees apart from the loan money
- Options available for refinancing loans
- Penalties for late payment
What are the types of short-term loans?
The various types of the short term loan are:
1) Line of credit
This type of loan is like a credit card, but credit lines have a much lower annual percentage rate than normal credit cards. A limit is set for the credit that the borrower can use the loan whenever he/she wants. The payment for the loan is made through monthly installments. These monthly installments depend upon the amount of loan that the borrower has taken.
2) Installment loans
Since everything is done on online platforms so why not borrowing money, installments loans allow the borrower to loan money by getting approval for the loan online and getting the money in the bank account easily within minutes.
3) Payday loans
These are the easiest type of loans that anyone can get in case of a financial emergency. Lenders give them out easily. However, with payday loans, the borrower will have to repay the loan amount and the interest in one go on the payday. The lender takes the money from the bank account of the borrower when it’s the due day. One more drawback of payday loans is that they have a high rate of interest.
4) Merchant cash advances
This is a type of cash advance. In this type of loan, the individual borrows money from the lender, and the payment for the loan to the lender is made by giving them access to that individual’s credit. So whenever a purchase is made, a specific percentage of returns go to the lender till the entire loan is repaid.
5) Invoice financing
In this, businesses borrow money from lenders based on unpaid invoices. The invoices are sold to a third party who is the lender of money. Then, they pay the money for the invoice to the company. This is useful for the organization’s growth, improves cash flow, investments, and paying employees. And when the invoice amount is paid, the money owed to the business goes to the business, and the lender takes the interest amount. See short term loans here for more information on short-term loans.
So what are the benefits and drawbacks of a short-term loan?
Benefits of short term loan
- These types of loans have various benefits for the borrower.
- Significantly lower interest than long-term loans due to short time
- Requirements are easily met, so they are easily approved and acquired
- Lower risks, so the borrower obtains the loan faster
Drawbacks of short term loan
One major drawback of the short-term loan is that the borrower can only obtain small loans. However, since the payback period is short, short-term loans include smaller amounts of money than long-term loans.
Short-term loans include various types of loans that individuals and businesses can benefit from. They are particularly useful for individuals who need immediate funds due to a sudden financial crisis. And businesses, especially small startups, offer a way to improve cash flow, allow payments of employees and clients, and invest in new projects easily.