Short-Term Loans – Definition, Characteristics, and Types

short-term loans

A short-term loan is a type of loan that is repaid within a short period of time, typically one to two years. Short-term loans are often use to cover unexpected expenses, such as medical mandibles, car repairs, or home improvements. They can also be used to consolidate debt or finance a major purchase.

What are Short-term Loans?

Short-term loans are loans with little to no collateral that are to be repaid in a year or less, sometimes weeks or months. Most require proof of employment with a specific monthly salary, a bank account, and a driver’s license or another form of ID. Because there is often no insurance and the credit requirements are lesser, these loans charge a higher interest rate (up to 400 percent) and may have other fees and penalties.

Types of Short-term Loans

Short-term loans come in several types, each with different characteristics, fee structures, and terms:

Payday loans

One of the most common is the payday loan, which provides cash for borrowers as they await their next paycheck. Usually, the only requirement is a pay stub to prove you have a job. These loans often require prompt payback — as soon as your next paycheck clears — and many come with enormous APRs and fees.

Car title loans

Another type of short-term lending, a car title loan, allows the borrower to use their vehicle as collateral as long as it’s owned outright. These loans usually will enable you to borrow just 25 to 50 percent of the car’s market value and can come with APRs of 300 percent and repayment windows as short as 15 to 30 days. If you’re late with payments, the interest charges mount, and the loan will cost you far more.

Bank overdrafts

Bank overdrafts, where customers get temporary coverage from their bank at a hefty interest rate when their accounts lack the necessary funds, are also a form of short-term loan. As are installment loans, where borrowers have regular, frequent payments over some time until the principal and interest have been repaid.

Benefits of Short-term Loans

A short-term loan may seem attractive for these reasons:

Quick access to cash: Short-term loans can provide you with an instantaneous entree to cash when you need it. This can be helpful if you have an unexpected expense, such as a medical mandible or car repair.

Consolidation of debt: Short-term loans can be used to consolidate debt, which can save you money on interest. If you have multiple high interest debts, you can get a short-term loan to pay them off. This will give you just one monthly payment to make, and you may be able to get a lower interest rate on the short-term loan.

Financing a major purchase: Short-term loans can be used to fund a significant investment, such as a new car or home improvement. This can be a good option if you don’t have enough money saved up for the purchase.

High interest rates: Short-term loans typically have high interest rates. This means that you will pay more interest over the life of the loan.

Short repayment terms: Short-term loans typically have short repayment terms. This means that you will need to make the monthly payments on time. If you miss a reimbursement, you could damage your credit score.

Debt trap: If you are not careful, you could end up in a debt trap. This means that you will be taking out more short-term loans to pay off the old ones. This can be a vicious cycle that is difficult to break.

When to Consider Short-term Loans

A short-term loan may be worth considering when you’re in a crunch and need cash quickly, as they typically offer rapid funding. These types of loans can also be a good choice if you have poor credit or no credit history established, as the requirements for approval are primarily based on salary and other factors.

If you use a short-term loan responsibly, making payments on time and paying it off quickly, this form of borrowing can also be a tool to boost your credit score. Additionally, if you’re looking for a form of lending that allows you to be debt-free quickly. Short-term loan may be a good choice, as the repayment timeline is typically 18 months or less.


If you are considering a short-term loan, it is essential to do your research and compare interest rates and fees from different lenders. You should also make sure that you understand the standings of the loan before you sign anything. Only borrow what you need and be prepare to make the monthly payments on time.

If you are struggling to repay a short-term loan, there are some options available to you. You can talk to your lender about refinancing the loan or consolidating it with other debt. You can also consider seeking help from a credit counseling agency.

Written by Go Business Tips

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