What are Short-Term Loans and How They Work

A short-term loan is a type of loan that is typically repaid in a shorter time frame than more traditional long-term loans. Unlike long-term loans that are designed for larger purchases, short-term loans are designed for smaller, immediate financial needs, like emergencies.

When unexpected expenses arise, and you need quick financial support, a short-term loan can be a helpful solution. Before deciding on the type of financial support you need, it’s a good idea to make sure you understand what a short-term loan is and the reasons why it might be the right choice for you.

What is a Short-Term Loan?

A short-term loan is a type of loan that has shorter loan terms, like a shorter repayment period or a smaller loan amount. While many loans offer larger loan amounts that take several years to pay off, short-term loans offer smaller loan amounts that only take several weeks or months to pay off. 

These types of loans are made to provide quick access to the money you need for urgent financial expenses. For example, these loans are often used to cover unexpected expenses like bridging the gap between paychecks, managing a temporary gap in cash flow, or managing urgent bills.

Types of Short-Term Loans

There are several types of short-term loans that come with these smaller loan terms. For example, there are payday loans, car title loans, lines of credit, installment loans, merchant cash advances, and invoice financing.

Payday Loans

A common type of short-term loan is a payday loan, a small, short-term loan that is typically due on the borrower’s next payday. They are designed for quick access to cash when you need it most. Lenders will have the borrower submit a post-dated check or authorize an automatic withdrawal from your bank account to repay the loan amount on your next payday. 

Car Title Loans

Title loans allow borrowers to use the title of their car as collateral to secure a short-term loan. Lenders will have a lien on your title during the duration of the loan, and if you fail to make payments, there is a risk the lender will have to repossess the vehicle. 

Collateral loans like these can be useful as a short-term loan for bad credit since the loan is approved largely based on the car and its value, rather than the borrower’s credit score.

Lines Of Credit

Lines of credit are a flexible type of short-term loan that allows borrowers to withdraw funds up to a predetermined amount. For example, credit cards are a line of credit where you can borrow up to your credit limit. 

Lines of credit are advantageous because they can be used for various purposes and you can borrow regularly up to your credit limit.

Installment Loans

Many short-term loans are paid back in one lump sum since they are usually for smaller amounts and only borrowed for a very short time. But installment loans are a type of short-term loan that is actually repaid in multiple payments over a set period of time. This loan usually comes with a set payment schedule with fixed, regular payments. 

Merchant Cash Advances

Merchant cash advances are a type of short-term business loan that provides businesses with a lump sum of cash in exchange for a percentage of future credit card sales. This type of financing is often used by businesses with fluctuating revenue who need quick access to funds.

Invoice Financing

Invoice financing is another type of short-term business loan that allows businesses to borrow against their outstanding invoices. Short-term loan lenders advance a percentage of the invoice amount and charge a fee. This helps businesses get the cash flow they need by providing an advance on the invoice payments they have coming in.

How Short-Term Loans Work

Short-term loans provide fast financial relief for borrowers in need of immediate funds with a very simple and easy process. How this loan works exactly will depend on the individual lender, but in general it works by submitting an application, getting approved, and entering a short repayment period to pay it off.

Step 1: Submit an Application

The application process for this type of loan is usually pretty simple and straightforward. You’ll most likely need basic information like your name, address, and other contact information, a form of identification, and possibly proof of income in the form of a bank statement or paystub.

Step 2: Get Approved Quickly

Because the application process for this type of loan is fairly simple, that means those who qualify can get approved quickly. After getting a fast approval, borrowers can often receive the money they need quickly too.

Step 3: Repay the Loan

Once you accept the loan funding, you’ll enter into a repayment period. For shorter loans like these, the repayment period is often shorter too. You might have one lump sum payment to make a week or two after you take out the loan, or you might have as little as two payments to make before the loan is paid off.

How to Get a Short-Term Loan

To get a short-term loan, you’ll want to take some time to assess your financial needs, research different lenders to get the best loan for what you need, and gather the necessary documentation so you’re ready to apply. 

1. Assess Your Financial Needs

The first thing you’ll want to do to get a short-term loan is thoroughly assess your financial needs. Doing this will help you see if getting a short-term loan is right for you or not. Having your financial documents in order will also make it easier to apply for financing. 

2. Research Different Lenders

Before picking a loan, make sure you do your research on lenders. You want to find a lender that is trustworthy and responsible. Look for lenders that are direct lenders and licensed lenders so you can get the attention your loan deserves. 

3. Gather Documentation

You may be required to provide certain financial documents in order to get a short-term loan. Make sure you have documentation ready to go, like your identification, income verification, bank information, and so on. 

Short-Term Loan Benefits

There are many potential benefits to short-term loans including a quick application process, fast funding, and lower credit score requirements. Whatever your reason for getting a loan like this, you can enjoy the benefit of fast and simple financing for your immediate monetary needs.

Quick Application

While traditional loans may take days or even weeks to process an application, short-term loans often have a simpler and more streamlined application process. This allows for short-term loan applications to be processed and approved within hours or just a few days. This quick turnaround is often beneficial in urgent situations when a borrower might need an emergency loan.

Fast Funding

Short-term loans are known for their quick funding time. Generally, you can access the money you need almost immediately after approval. Once your loan application is approved, the funds are typically deposited directly into your bank account or cash is given to you that same day.

Lower Credit Score Requirements

Short-term loans often come with lower credit score requirements compared to traditional loans. Lenders offering these loans typically focus on your current ability to repay rather than your credit history, making them a useful option for borrowers with less-than-perfect credit scores.

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