While it can be easy to qualify for short-term loans—even if you have a low credit score or limited income—many come with unfavorable rates and terms. The high fees and interest rates make it an expensive form of debt, and the short repayment terms can leave borrowers financially worse off. There may be more affordable options. Knowing what a short-term loan is and how it works can help you make an informed decision.
Typically, installment loans stretch fixed payments out over several years, and borrowers have the option to repay early (sometimes for a fee). The long repayment period means you’ll pay less money each month, which can be beneficial in creating and sticking to a monthly budget.
Short term loans often must be repaid in a year or less, sometimes in only a few weeks. Because the credit requirements are lower, short-term loans often charge a higher interest rate and may come with other fees and penalties.
Several types of loans often meet the criteria, including:
Payday loans are one of the most well-known types of short-term loans. Payday loans can also be referred to as cash advance, check advance, deferred deposit, or deferred presentment loans.
Many payday loans require a stable income, but do not require good credit. Often, you can receive the funds—minus any applicable fees—the same day. In exchange, you give the lender a post-dated check for the full amount or permission to take a direct debit from your bank account on a predetermined date. Most of these loans are repaid with a single payment within two to four weeks and can carry an annual percentage rate (APR) of nearly 400%. Several states also limit payday loans to $1,000 or less.
While many payday loans let you extend or “re-up” the loan, you may pay a fee and continue accruing interest. This puts many borrowers into a “debt trap,” continually renewing their payday loans to cover the interest and fees.
Auto title or car title loans may be another option for a short-term loan if you have bad credit. Since you are using your car as collateral, the lender may not require a credit check. Like payday loans, you may also receive the funds—minus any applicable fees—the same day.
However, auto title loans have a short repayment period, sometimes as little as 15 to 30 days. Borrowing this way is also expensive. Many auto title loans carry an average APR of 300%, according to The Federal Trade Commission. And if you default on the loan, the lender can seize your car.
Pawnshop loans are another type of short-term secured loan. Like an auto title loan, you’ll hand over a personal possession in exchange for a loan based on the item’s value. To reclaim your property, you’ll need to pay the loan back quickly. Otherwise, the pawnshop can take and sell your item. You may also have to pay interest, fees to set up the loan, and fees to store your items, which can lead to high APRs.
Some lenders offer short-term personal loans with quick repayment schedules and high interest rates. Rather than requiring a single payment, like a payday, auto, or pawn loan, you’ll make weekly, biweekly, or monthly payments on a predetermined schedule.
If the loan has a repayment period of six-months or less, some states limit the APR that lenders are allowed to charge to less than 50%, but many states allow more than 100% APR and some states have no cap at all.
These high-rate, short-term personal loans shouldn’t be confused with other types of personal loans. Many unsecured personal loans have longer repayment terms and lower interest rates, which may give borrowers access to a larger loan with manageable monthly payments.
Most short-term loans are a last resort for borrowers who worry they might not qualify for other types of loans.
Some people turn to high-rate, short-term loans when they need immediate funds but don’t feel they have the credit or income to qualify for a better loan or line of credit elsewhere.
However, you may want to consider other lenders before you turn to payday or auto title loans. Each lender sets its own credit and income requirements, and many lenders work with a range of borrowers. You may also be able to see if you pre-qualify without impacting your credit score.
If you don’t need the funds immediately, you may also consider taking steps to improve your credit. Paying your bills on time, paying down debts, and limiting credit applications can all improve your credit score over time.
Short-term loans are often advertised as allowing you to complete the entire process online. While this can be true, the implication that only short-term lenders can offer these benefits is a bit of a marketing gimmick. Many lenders, both online marketplaces and traditional brick-and-mortar lenders now allow you to apply online. In many cases, you may be able to apply and have your loan funded entirely online.
Many short-term lenders offer same or next day funding, which can be appealing if you’re in need of money quickly. But some traditional lenders also offer quick funding. For example, most LendingClub personal loan members are approved within 24-hours1, and you could have your money within two days2.
Short-term loans can be beneficial when you’re in a financial pinch but proceed with caution. Here are some of the major pros and cons.
You don’t need good credit.
Many short-term loans don’t require good—or any—credit to get approved.
You may have access to funds faster.
The lack of a credit check can increase the approval and funding process, which means you may be able to get the loan the same day you apply.
APR can be high.
Lenders often charge high APR, which can make short-term loans an extremely expensive type of debt.
Can be difficult to repay.
Because these loans must be repaid quickly, many borrowers are unable to come up with enough money to repay the short-term loans plus interest while managing their monthly expenses. As a result, they might need to take out another loan or pay a fee to extend the first loan,
May require collateral.
Some short-term loans, such as auto loans, may require collateral. If you default on the loan, you risk losing your property.
There are a few situations when getting a short-term loan may be your only option, and it could be better than missing an important bill. However, many personal loans don’t require perfect credit and offer fast funding and longer repayment terms, which makes it easier to get out of debt and find financial freedom.
With LendingClub Bank, you can check your loan rates without impacting your credit score in only a few minutes, so it’s worth checking to see if you qualify before assuming an expensive short-term loan is your only option.
1Of all personal loans approved between 10/1/20 – 12/31/20, 69% were approved within 24 hours.
2Between July 2021 and September 2021, more than two-thirds of personal loans issued by LendingClub Bank were funded within 48 hours after loan approval. The time it takes for a loan to be funded is not guaranteed and individual results vary based on multiple factors, including but not limited to investor demand.
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