Top 3 Advantages and Disadvantages of Short Term Loans

advantages of short term loans

Unexpected expenses crop up for a variety of reasons: medical bills, home damages, pay cuts, etc.

Maybe your family breadwinner is out of commission for a few months due to illness or injury—or your family’s primary vehicle needs repairs that you simply can’t afford.

These rainy-day expenses have the potential to blow right through your monthly budget, leaving you short on rent and food money. In situations like these, many people turn to short term loans as a way to pay for unexpected or difficult personal expenses.

Short term loans offer you borrowed capital that you pay back, plus interest, usually within a year or less. If you’ve come across some hard times and need cash fast, you might consider getting a short term loan.

As you consider if this route is right for you, take a look at the top three advantages and disadvantages of short term loans.

Advantages of Short Term Loans

There are many reasons why you might benefit from getting a short term loan. Here are the top three advantages:

1. Quick Payout

If you are in the market for a short term loan, chances are you need money fast. Luckily, a short term loan application can be approved in a matter of hours.

This is especially helpful in an emergency situation where you need to make a payment as soon as possible.

For short term loans, there’s no lengthy approval process as you might find with other types of loans.

Most loan applications can be completed entirely online or over the phone. Depending on your bank or lender, you can have access to the borrowed funds that day, or the following business day.

The money is deposited directly into your account. This is a huge advantage that can make a big difference for people who need immediate access to money they don’t have.

2. Opportunity for Borrowers with Bad Credit

Short term loan lenders do not put a huge emphasis on your credit history for approval. More important is proof of employment and a steady income, information about your bank account, and proving that you do not have any outstanding loans.

This is great news for people who have a limited credit history or bad credit.

Your credit history doesn’t have to hold you back from getting the emergency cash you need to cover an unexpected expense.

A short term loan is also a good opportunity to improve or build your credit history. As you pay back your loan on time, you’ll see your credit rating improve.

3. Flexibility

Short term loans offer amazing flexibility, which is helpful if cash is tight right now but you anticipate things getting better financially soon.

Before signing for your short term loan, you and the lender will make a schedule for payments and agree to the interest rates up front.

Another advantage of getting a short term loan is that they offer only a short term commitment.

As long as you can pay off your debt on time, typically within six months, you don’t need to worry about a large loan hanging over your head for years—you can focus on the immediate future and getting out of your difficult financial situation.

Disadvantages of Short Term Loans

No financial solution is perfect for every borrower. Take a look at the three top disadvantages of taking out a short term loan.

1. Higher Interest Rates

The biggest drawback to a short term loan is the interest rate, which is higher—often a lot higher—than interest rates for longer-term loans.

The interest payments on top of paying back the loan balance can lead to higher payments every month.

However..

Keep in mind that with a short term loan, you’ll be paying back the lender within a short period of time—which means you’ll be paying the high interest for a shorter time than with a long-term loan.

The longer you owe, the more interest you have to pay. Long term loans may have lower interest rates, but you’ll be paying them over several years. So in the long run, depending on your terms, a short term loan may actually be cheaper.

2. Potential Damage to Credit Score

While repaying a short term loan on time according to your agreed upon schedule can be a significant boost to your credit score, failing to do can cause it to plummet.

An outstanding short term loan will increase your debt to income ratio, causing your credit score to take a hit. This can be damaging if you only have a little or good credit history, and devastating to your future potential to borrow if you already have poor credit.

Before taking out a short term loan, be honest with yourself about your ability and discipline when it comes to paying back the loan on time.

3. Debt Cycle

If you have a problem with spending more than you can afford, taking out a short term personal loan because you are short on cash will only perpetuate the problem. Some people get caught in a cycle of making expensive purchases and then finding themselves short on funds for the necessities, forcing them to take out a high-cost loan.

Then repaying the loan puts another strain on their finances, and if the excessive spending isn’t reigned in, they might need another loan and will perpetuate a cycle of accruing and relying on debt.

A short term loan is best for people who are in an unexpected emergency situation requiring instant access to cash that couldn’t otherwise be spared.

There are many advantages and disadvantages of short term loans. Considering the top advantages and disadvantages of short term loans will help you decide if this financial tool is right for your situation.