Log InJoin 

Pros And Cons Of Short Term Loans

Pros And Cons Of Short Term Loans

Consumers and small businesses may find themselves in a financial bind and need a short-term or "bridge loan" to tide them over until additional resources become available. If used responsibly, short-term loans can be invaluable tools for times when money is tight, credit is unavailable and a problem like an emergency bill or automotive repair needs to be handled immediately. There are numerous pros to short-term loans but the cons can be significant and it is important to understand the benefits and limitations before signing on the dotted line.

Pros of Short Term Loans

Significant benefits of short-term loans include rapid distribution of funds, extensive geographic availability and the need for minimal collateral or background checks. When it comes to payday, pawn shop or title loans, a valid checking account, proof of employment, personal possessions or a car title means most consumers can receive cash in hand or direct deposited into their checking account on the same day they apply for a loan. This is virtually unheard of outside a credit card cash advance or borrowing money from a friend or family member. More traditional types of loans can take weeks to conduct a thorough evaluation and finally receive approval. Short term personal loans are specifically tailored towards individuals who have bad or questionable credit and may never qualify for a loan from institutions like the bank or credit union.

Cons of Short Term Loans

The minimal requirements and easy accessibility to short-term funds can come with significant drawbacks and repercussions. Since short-term loans are often considered a financial resource of last resort, organizations which issue these types of loans tend to charge excessive fees, have rigid terms and onerous interest rates. There is no such thing as a free lunch and if you want $500 in cash within a few hours of applying it's going to come with strings attached. Short-term loans can be for any length of time but on average they last about two weeks. The interest rate for a secured short-term loan may be as high as 15% which on an annualized basis can be thousands of percent. If a borrower should default, they run the risk of losing any underlying collateral like a car or any personal possessions used at a pawn shop.

Choose Your Loan Wisely

If the necessary funds can be obtained by any other means than a short-term loan then they should be considered first. There are numerous other and better ways to get cash such as borrowing from a relative or friend, asking for a cash advance from work, starting a part-time second job and having multiple garage sales. If you have to get a short-term loan, be sure to ask an inordinate number of questions, especially about contract terms you may not understand, and receive copies of all loan documentation. The reason why short-term loans have such bad reputations is because many consumers become unable to repay the loan on the agreed upon date and for the payoff amount. This leads to additional short-term loans making matters worse. Protect yourself and your finances by only getting a short-term loan if it is absolutely necessary and paying it back in full on or before the agreed to date.

Image by: Ian Murchison