A lot of people are turning into fintech firms or financial technology companies to avail of short term loans as compared to traditional banking options, which make up about 38 percent of the personal loan market.
Short term loans involve borrowing a small amount of cash, which is usually most-sought to keep families going until the next paycheck. Also, you can borrow money from a short term loan to capitalize a small business.
But, what are the important things you need to know before you get a short-term loan? Let’s find out.
Review the Loan Term
Unlike long-term loans that span for 25 to 30 years, short term loans are usually paid off in a short period, between six months to a year or two. While short term loans are typically paid on a specific due date or schedule, some companies allow borrowers to pay at their own pace.
If you want to get fast cash, you can get short term loans at Personal Money Network, and other trusted and reputable loan providers. You’ll find great companies that offer a wide array of short term loans based on your needs with flexible rates and terms. Just make sure that you fully understand the loan term before signing any agreement or contract.
Importance of Short Term Loans
Why do you need to get a short term loan? Many people find it difficult to budget money from daytime jobs nowadays. There are so many bills to pay – from electricity and water bills to cable and telephone bills. Also, if you have children, you need to make sure that you meet their basic needs, and each family member means additional expenses.
Here are the important benefits of getting a short term loan:
- The requirements for a short term loan are easy to meet.
- Get quick cash as compared to other loan options available.
- You can choose from a wide array of short term loan options.
- The loan terms are flexible.
- You can get out of debt by getting a short term loan.
Types of Short Term Loans
Because of the flexibility of short term loans, borrowers can get quick cash to help sustain their needs, like paying overdue bills, medications, or fund a startup business.
The different types of short term loans are:
- Payday Loans: A payday loan is an emergency short term loan that is considered the most sought type of loan nowadays. When the payday of the borrower arrives, the total amount of loan and the interest must be paid as a lump sum.
Usually, continuous payment authority applies, wherein the lender takes the amount from the bank account of the borrower.
- Merchant Cash Advances: It’s a cash advance that operates as a short term loan, wherein the lender loans the cash amount that the borrower needs. The lender is given access by the borrower to his credit facility to make loan payments.
Every time a borrower purchases an item, the lender takes a certain sale percentage.
- Lines of Credit: It is likened to using a business credit card, wherein there’s a set credit limit. Monthly installment payment applies, and the line of credit can be tapped as needed. That’s why the due date of monthly payments may vary.
There’s a lower charge of Annual Percentage Rates (APR) for lines of credit as compared to business credit cards.
- Installment or Online Loans: As the term implies, this type of loan is done online. It means that loan application and loan approval are all done online, too.
When the loan application has been approved, the money or cash is wired to the bank account of the borrower.
- Invoice Financing: Unpaid invoices or business’ accounts receivables can be used to borrow money or get a short term loan under invoice financing. With this type of loan, the borrower can loan based on the outstanding invoices (number of weeks). When they are paid, the lender charges a loan interest before they are returned to the borrower or a business.
Compare Interest Rates and Loan Terms
Comparing loan terms and rates is very important before getting a short term loan. The interest rates of a short term loan make a direct impact on the amount of money you’ll have to pay back.
Simply add the borrowed amount and the interest rate to know how much you’ll be paying the lender when the due date arrives. Of course, the higher the interest rate, the more money you need to pay.
Here are some tips when comparing interest rates and loan terms:
- The most important factor when determining the best type of loan is the annual percentage rate, which includes points and fees.
- If you can afford to make monthly payments, choose a short term loan with the least owed amount of money over the entire loan term.
- Balloon payment refers to the remaining money that is due or owed toward the end of your loan term. Check if the loan has a balloon payment, and if you choose this option, make sure to have the amount of money prepared to pay when your loan comes to avoid it.
Determine If You Can Afford the Monthly Installment
Missed payments may result in a hefty amount of late charges, interest rates, and other fees. That’s why you have to determine if you have the capacity or ability to pay the monthly installment. Before applying for a short term loan, talk to the lender, and discuss your options.
Here are some helpful tips when assessing your ability to pay a loan:
- Source of Income: Make sure to evaluate your source of income, such as your daytime job, part-time jobs, startup business, online business, and other possible sources of income. If you have a partner, you can consider their income as a source of income, too.
- Assets: Aside from money or cash sources, your assets, like your real estate, car, stocks, and jewelry, are considered valuable assets. But of course, you don’t want to end up selling your priceless belongings just to pay a short term loan.
However, knowing that you have valuable assets will give you more confidence in borrowing money to fund important projects, like home improvement or renovations, college education, buying a new car, or funding a business.
- Liabilities: Some examples of liabilities include outstanding debts (e.g., mortgage, car loan) that you’re still paying, child support payments, and your monthly household and personal expenses.
Short Term Loan Requirements
A short term loan is a lifesaver for private individuals and smaller businesses. Payday loans are usually accessible to borrowers with poor credit because they don’t need a credit check.
Because the requirements are easy to meet, many people take advantage of short term payday loans. Upon submitting the complete requirements, the short term loan application can be processed as quickly as 15 minutes.
Here are the requirements of a typical short term loan:
- Legal age (at least 18 years old)
- Valid identification
- Active checking account
- Proof of income, such as employment certificate or recent 3 to 6 months payslip
Paying a Loan
When it comes to paying back the loan, your borrowers usually write a check, and the lender holds the check until the predetermined due date. This mode of payment is writing a post-dated check. When a borrower has trouble paying the amount due, the loan can be extended with more fees tacked on.
Short Term Loan Fees and Charges
Make it a point to read the terms and conditions of a short term loan. In that way, you’ll fully understand the costs associated with late or missing payments and if there are hidden fees.
In a loan agreement, all fees and charges should be indicated. Otherwise, any future charge not specified on the loan agreement is considered invalid.
Here are the charges you need to look for in a loan:
- Missed Payment Fee: It’s a fixed amount charged if the borrower missed a payment. You can pay this charge separately or include it in your total repayment.
- Transmission Fee: It’s charged for processing a loan application quickly, such as payday loans. This fee is rarely charged nowadays.
- Origination Fee: It’s a fee to set up a loan, similar to a transmission fee.
- Extension Fee: This fee applies if the borrower wants to push the final payment date.
- Broker Fees: Payment for broker’s services to find a suitable loan based on individual needs.
- Late Payment Interest: This fee applies to the interest charge for every late payment.
- Early Repayment Penalty: It covers the cost of lost interest if a borrower decides to pay the loan in full before the due date or agreed date.
When it comes to short term loans, every borrower should consider the APR, interest rates, and capacity to repay the loan. The requirements to get a short term loan are easy to meet, so you can get a personal loan or payday loan for quick cash.
However, before getting a short term loan, it’s important to have a clear purpose or goal to ensure that you use the money properly.
Tony Cooper understands how vital money is for everyone, which is why he decided to become a financial adviser. Through this profession, Tony helps people who have been struggling with their finances and budgeting. Aside from personally providing financial advice, Tony also shares his knowledge with the world by writing articles on financial management, budgeting, loans, and bankruptcy.