Understanding the Different Types of Short-Term Personal Loans

Short-Term Personal Loans

At some point in our lives, we might need some financing to help us get by. In your case, you probably need fast cash to cover immediate expenses. A short-term personal loan can help you with that.

A short-term personal loan is an unsecured type of loan. This means no collateral is required for you to qualify. However, this also means higher interest rates since it is riskier for the lender to let you borrow without pledging collateral.

How Does a Short-Term Personal Loan Work?

Most of the time, traditional personal loans get to be repaid for several years. On the other hand, a short-term personal loan is usually required to be repaid within a year or a couple of months or weeks.

The short-term personal loan you will be getting will depend mostly on the lender you choose and your creditworthiness. However, they will most likely work like this:

  • You will apply for a short-term personal loan with the lender you chose to cater to your needs
  • The lender will run a credit check or use other methods to evaluate your financial history
  • Once the lender approves your loan request, you will receive a loan offer, which includes the loan term and the interest rate
  • After agreeing to the loan offer, you will receive the money (most likely within 24 hours)

Types of Short-Term Personal Loans

Below are the types of short-term personal loans you should know about:

Emergency Cash Loans

Emergency cash can come in different places. Ideally, you should have an emergency fund so that you don’t have to worry about unexpected expenses. However, if you don’t have one, you might need to get an emergency cash loan.

Emergency cash loans are designed to help borrowers who require immediate funds. They can use the cash for medical bills, car repairs, or any unforeseen expenses. When it comes to this type of loan, it is recommended to look for a bank or a credit union first because other lenders might promise easy approval and fast cash but with greater costs such as unfavorable terms and higher interest rates.

A bank offers an emergency cash loan in a variety of ways:

  • Home equity loan
  • Cash advance through your bank-issued credit card
  • Home equity line of credit (HELOC)
  • Unsecured loan (also known as a personal loan or signature loan)

Payday Loans

A payday loan can help you cover your immediate expenses until you get your next paycheck. An average payday loan can let you borrow around $350 on a two-week loan term. However, it can also range from $50 to $1,000 depending on the lender and your state’s laws that govern payday loans.

Different states in the country have different laws when it comes to payday loans. These laws were created to limit the loan amount you can borrow and the interest rates and fees the lender can charge. Furthermore, you need to know that few states prohibit payday loans.

Most of the time, your loan payments are due within two weeks or a few days close to your next payday. You’ll repay the loan with a single sum of money in full, including the finance charge by its due date.

Line of Credit

A line of credit can give you access to a certain amount of money that you can borrow in case you need to. Banks and credit unions most likely offer this type of loan. The maximum amount you can borrow, the interest rate, and the repayment terms will depend on your creditworthiness and the lender you choose.

This type of loan is useful for unexpected expenses you might have. Once you have repaid the loan amount in full, the set maximum amount your credit line has will be available again. This means you can choose to borrow again in case of emergencies or if you want to. You can borrow money, pay in full, and repeat as long as you stand by the terms and conditions agreed upon on your line of credit.

Short-Term Personal Loans and Your Credit Score

Taking out a short-term personal loan typically has some impact on your credit score. If the lender chooses to run a hard inquiry on your credit during your application process, your credit score will most likely go down but only for a couple of points.

If you make a late payment, your credit score may go down as well. Hence, it is best to repay your loan on time and with the right amount agreed upon.

Taking out a payday loan will not make sense if your goal is to build credit since it is not reported to credit bureaus. Other types of short-term loans can help you with that as long as you stay true to your repayments.

In Conclusion

If you can’t think of any way to get money fast, a short-term personal loan might save you. However, it would be best if you kept in mind that getting one carries some risks. This includes higher interest rates and short repayment terms. Hence, it is vital to get a loan you can afford to avoid further financial problems in your future.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.