The COVID-19 led tide has halted entire economies. Not surprisingly, this has led to a sudden surge in demand for loans – particularly short term loans. Short term loans generally let you borrow and repay within a year of availing the loan. It’s not a typical bank loan as the borrowing amount is usually low and the loan terms are also more flexible.
These loans are best used to finance short-term, temporary liquidity crunch or when there is a sudden big expense such as a home repair or a major car repair. They are also helpful for people who need money to tide over tough times until their next paycheque and hence, need flexible payback options. Usually, short term loans are unsecured, which means that you don’t have to borrow against collateral. Read this blog to dig a bit deeper into the utility of short term loans and why they are preferred over some other borrowing options.
Types of Short Term Loans
Broadly, short term loans can be classified as secured short-term personal loans and unsecured short term loans. In a secured loan, you have to register one of your assets as collateral security against the loan amount that you borrow and in the latter, no collateral security is needed. Keeping aside all other factors, the interest rate for the secured short-term personal loan is lower than other loan types.
The most common type of unsecured loan is a payday loan. These short term loans are emergency loans that are relatively easy to avail. There is no other short-term loan option that spells financial ease like a payday loan. Almost always, every step from application to documentation and disbursal is online and hassle-free. But do make sure you check and compare options and also your eligibility before applying.
How are they different from long term loans?
1. Basis of payment
A general rule of thumb is that long-term loans allow you to borrow more and hence, have a longer repayment schedule, and short-term can be repaid within months. In the latter case, there is less time for interest to accumulate, so you end up paying less in the long run.
It is easier to receive a short-term loan as lenders do not have policies and eligibility criteria as strict as that for long-term loans.
This is also because the secured long-term loans have a mortgage loan that needs a thorough and sometimes demanding risk analysis process before loan approval. They require more paperwork and have longer TAT.
On the contrary, short term loans can be availed in a day.
Short term loans come with various options which make them as flexible as other loan options. Borrowers can also opt for revolving credit and get money as per their needs. This helps reduce the interest burden. However, most long-term loan providers generally give fixed and not floating interest rate options.
4. Credit scores
Long-term loans are difficult to avail by the masses as they require a high credit score to get assurance about the borrower’s long term repayment capacity. Whereas, a short-term loan can be availed even at lower credit scores.
What makes them preferable over the other available options?
1. Interest rates
Most short term loans need to be paid off within a year, so there are lower total interest payments. Compared to long term loans, the amount of interest paid is significantly less.
Short term loans generally have higher flexible interest rate options that vary with the loan amount and tenure.
2. Low risks
Short term loans are less risky than long-term loans because they have a shorter maturity date. Hence, the borrower’s ability to repay the loan is less likely to change significantly over such a short time period.
This is also why the time taken for underwriting the loan is shorter and funds get disbursed quickly.
3. Speedy approval
Because these loans are considered less risky, speedy approval within a day is possible. It’s even the norm. Short term loans can often be lifesavers for smaller businesses or individuals who face a sudden cash crunch.
The requirements for such loans are easier to fulfill, also because these loans are usually for relatively smaller amounts, as compared to the long term loans.
Even top bankers offer short term loans. These loans are disbursed faster and have a short and simple application process. The repayments are typically done by deducting a pre-decided amount from the borrower’s bank account, using the continuous payment authority.
If you’re still wondering about which loan type to choose from, try to find a lender that can customize a loan after evaluating your needs. Then make your decision basis credit market, ease of availing credit the cost of doing so, long term profitability, and the collateral requirements.