A Guide To Short Term Loans
Any time a person borrows money there are a lot of variables that impact the experience. Borrowers need to be aware of all the benefits and drawbacks to the different types of financial products available on the market today before they sign on the dotted line.
Depending on a person’s credit worthiness, terms of loans can be extremely manageable or a downright nightmare with no escape.
Typically, the financially unsophisticated are the ones who pay the highest price simply because they are unaware of what to look for.
We’ve produced a guide to short term loans to help borrowers understand common elements of available short-term borrowing opportunities. In other words, people will learn what loans are good for them and which ones they should stay away from.
What is a short term loan?
The generally accepted definition of a short term loan is one that is required to be paid back in less than one year. Pretty much any loan fitting that repayment schedule or with a shorter one, could be considered a short term loan.
These loans also typically have lower borrowing limit. For example a common short term loan may be 6 — 12 months in length and be less than £5,000.
Sometimes 12 month loans may be greater than £5,000.
Other short term loans may only be 1 — 2 weeks in length and limits max out at £1,000. These types of micro term loans are also known as pay day loans or pay day advances.
What Types of Short Term Loans are there?
There are a variety of structures for loans based on borrower demand. Depending on a person’s immediate need for funds as well as their credit worthiness, there are different financial products available.
Bad Credit Loans
Some loans are marketed to those with less than perfect credit scores. Bad credit loans are typically for smaller amounts and extremely short periods of time. Instead of credit worthiness, lenders generally require pay stubs from a person’s job or permission to withdraw future payments from a person’s bank account.
For those with slightly better credit, unsecured loans are an option. These are loans don’t require collateral like a bank account, vehicle, or property. They are extended based on the credit worthiness of the borrower.
Unsecured loans do have potentially higher interest rates than secured loans because they are riskier for the lender. The interest rate you get however will depend largely on your credit position and the type of lender you go with.
Secured loans are lines of credit secured by property. Various types of property may be accepted but typically it’s a vehicle. Payday advances are notorious for allowing borrowers to put up their car, truck, or motorcycle as collateral for a loan.
The caveat with secured loans is that if the borrower defaults on the loan, the lender can repossess the property. In other words the lender can come and take the vehicle if the borrower doesn’t pay.
What is credit rating?
Your credit rating or credit score is sort of like a grade for your credit worthiness. It tells lenders how likely you are to repay your loan.
Credit ratings are determined using a variety of information like your length of credit history, how many accounts you have open, how many late payments you’ve had in the past, and how much money you owe on your accounts among other metrics.
A low credit rating means you may be less likely to be granted a short term loan and if you are, the interest rate may be higher. A credit rating that is higher can mean a greater likelihood of approval and lower interest rates on the money you borrow.
How do I apply for a short term loan?
The application process for most loans is pretty much the same. The basic information that all lenders will ask for include name, address, phone number, email, employment information, and financial data.
Short term secured loans will ask for information about the property you are securing and most unsecured or more traditional short term loans will do some kind of credit check.
What are some things I should watch out for with short term loans?
Any time you borrow money you should be extra cautious about what you are getting. Make sure you read the small print on any agreement and that you understand what is expected of you fully before you commit.
Also, be sure that you have the ability to pay the loan back with the interest that’s being charged.
With those two basic things in mind, here are some other elements of short term loans to consider.
The interest rate is the amount of money you are being charged to borrow the money. Typically, it is paid each time you make a payment on the principle balance of your loan. It’s important to make sure you understand your interest rate and that it is at a level you can afford.
Some short-term payday advances for example can charge triple digit interest rates making it almost impossible to pay them back if the borrower goes past the initial period where the loan could have been paid back without interest charges. Some lenders have even been known to charge 3000% interest rates.
Aside from Payday loans, short term loans in general may have higher interest rates because the lender has less time to make money over the life of the loan.
Pay attention to the penalties that the lender is charging for things like starting the loan, accepting payment, or for late fees. For short term, small loan amounts, these fees can easily wind up being more than the amount originally borrowed.
Do I need a co-signer for a short term loan?
Depending on the type of loan and your credit worthiness, you may or may not need a co-signer. By definition, a co-signer assumes part of the responsibility for paying the loan back. Some types of small loans do not require co-signers.
For instance loans that are secured with collateral may not require an extra person to sign an agreement. Additionally, if a borrower has a favourable credit rating then co-signers are not necessary.
What if I have trouble paying my loan back?
Despite having the best of intentions, things happen, and people are unable to fulfil their credit obligations.
The worst possible thing you can do is avoid the issue and stop paying on your loan. Delinquent loan marks on your credit report will hurt your ability to borrow in the future. You may also incur additional interest and penalty charges for not paying on time.
The first thing you should do if you know you won’t be able to meet your scheduled monthly payments is to contact your lender and explain the situation. Many lenders can offer help when there are open lines of communication between borrower and lender.
For instance, some lenders may offer short periods of deferment, refinancing, or even modify the loan. The chances of things like that happening are rare though. Many lenders will not want to modify a contract and need all payments plus interest in full and on time.