There's no doubt about it—in life, stuff happens. Short-term loan scenarios are plenty. Think of a professional commuter whose car breaks down, and the repair costs are in the "budget-buster" category. A short-term loan could cover the fix, and get the commuter back on the road. Or, if a family breadwinner comes down with a threatening illness, a short-term loan could build a financial bridge in the interim, buying time until the borrower is healthy enough to go back to work.
Who is more likely to get a short-term loan? Fresh data from The Online Lenders Alliance reveals some interesting data on Americans and short-term loans:
- The median age of a short-term loan borrower is 41-years-old, up from 39-years-old three years ago.
- The median household income for short-term loan borrowers is $30,235, suggesting it 's lower-income consumers who are more likely to get a short-term loan.
- The median short-term loan amount is $428, up from $388 in 2014.
- The median cost for a loan (meaning loan interest and fees) is $113.
- Online short-term borrowers are slightly older than offline borrowers (at 43-years-of-age), and have more median household income (at $40,263.) Median loan amounts are higher for online borrowers, at $667 per loan, and median loan cost is significantly higher, at $690, suggesting it's prohibitively more expensive to borrow online.
- Typically, short-term loan borrowers pay off their debt between three- and 12-months after getting the loan. Payday loans usually mandate shorter repayment periods, sometimes as tight as two-weeks.
Defining Short-Term Loans
What is a short-term loan? Financial experts generally agree that short-term loans are widely available, but are specifically targeted for consumers who are likely to pay the loan back. Short-term personal loans come in myriad packages, often specific to the borrower's particular need.
"Personal loans are unsecured loans that can be given to anyone who has a regular source of income," says Jordan Russell, marketing analyst at Loan Away, a Canadian-based loan provider. "Therefore, even if you are unemployed but have a provable regular source of income, you can have a personal loan."
Watch Out For Rates and Fees
Costs, however, can be prohibitive for short-term personal loans, industry insiders say.
"Short term personal loans are expensive loans that you can get very quickly," says Jeff White, financial specialist at Fit Small Business, in New York City. "You repay them a lot faster than you would other loans and they are typically used for an immediate cash flow shortage."
"Generally, a short-term loan is defined as a loan that is expected to be repaid within a year," says Matt Collins, owner of Loans Now, a lending platform that has helped thousands of individuals secure funding during emergency situations. "Fees on these loans vary by each lender and by type—payday loans for example, are considered extremely short-term but have a much higher interest rate than traditional type loans."
Collins notes people can require a short-term loan for various emergency situations, whether it be car repairs or emergency vet visits. "It's vital, however, that payments are maintained, especially for short-term loans, as there are often hefty fees attached to late payments. When taking a short-term loan, make sure to do your research. Not every short-term loan is equal, and some can hurt more than they can help."
Short-term loans are also often referred to as payday loans, which are generally unsecured loans given to borrowers based on their next expected paycheck. "You're essentially borrowing money you're going to make in the future, and paying someone else to do it," White notes.
While regular short-term loans come with interest rates as low as 8.0%, payday loan rates can soar as high as 15%-to-30% of the total loan amount, White notes. "These loans can be expensive," he says. Experian offers various personal loans and if you sign up for free, you can see the best loans matched to you based on your credit data.
In early October, the Consumer Financial Protection Bureau issued some new rules for payday lenders. Essentially, the new rule requires lenders to determine upfront whether people can afford to repay their loans.
Benefits and Drawbacks of Short-Term Loans
Short-term loans do provide a significant service to borrowers—they get money to people who need it on a timely basis, often times to cover an emergency expense.
"The number one pro of a short-term personal loan is processing speeds—it's not uncommon to have cash in hand the same day that you apply for this type of loan," says Carmen Dellutri, founder of the Dellutri Law Group, a bankruptcy specialist firm located in Fort Myers, Fla. "The cons, on the other hand, are many and include steep fees, strict terms, and rates that are much higher than average than with traditional loans."
Dellutri advises short-term loan borrowers to check the loan contract's fine print carefully. "If you don't pay back your loan on time, you could wind up with a hefty penalty," he says. Those penalties often include a negative impact on your credit rating, hefty overdraft fees, credit collection calls and harassment, and legal action. "For example, lenders can take legal action if the borrower writes a bad check, and that could end up in court costing the borrower plenty in lawyer's fees."
At this point in time, payday loans are not reported to the credit reporting agencies—Experian, Equifax and TransUnion. This means that payday loans will not help you build a credit history.
Jordan Russell, marketing analyst at Loan Away, lists some "pros and cons" of short-term personal loans:
Positives of Personal Short-Term Loans
- Personal short-term loans are unsecured
- Non-payday loans can have low interest rates
- They have flexible payback options
- They're easy to get (compared to a business loan or debt consolidation)
Negatives of Personal Short-term Loans
- Sometimes, personal loans can take several business days to hit a bank account
- A lender can place a lien on home if they go unpaid
- Rates and fees can be costly with payday loans
- Loans are not reported, therefore do not help build credit
The Takeaway on Short-Term Personal Loans
Short-term loans can be a viable option if you're requiring a quick infusion of cash.
Just make sure you shop around for the best interest rates and terms, read the loan contract's fine print, and make your payments on time. Do that, and the chances are good that your short-term personal loan experience will be a positive one.
"If I know I can pay back the personal within the given time agreed with the lender, then I would definitely take out a personal loan," says Russell. "There is a need for them."
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.
This article was originally published on October 20, 2017, and has been updated.