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Personal Loans

What Is a Short-Term Personal Loan?

Even if you manage your money well, an unexpected expense like a car repair or illness can put you in a difficult financial situation. If you can't borrow money from friends or family but need quick cash to cover your expense, a short-term personal loan may be the answer. A short-term personal loan is an unsecured loan available to anyone with a regular income source. Read on to find out whether it might be a good choice for you.

How a Short-Term Personal Loan Works

Unlike a traditional personal loan, which you generally pay back over several years, a short-term personal loan is designed to be repaid within a year, or even just a couple weeks depending on the loan. Although the type of short-term personal loan you get will depend on your creditworthiness and the lender you choose, most of them work like this:

  • You apply for a loan with an online or storefront lender.
  • The lender performs a credit check or looks at your paystubs or other documents to evaluate your financial history.
  • If the lender approves your loan request, you'll get a loan offer, including an interest rate and term. You should receive your answer quickly—in fact, many short-term loan providers will get back to you within an hour.
  • You agree to the loan offer and receive the money. The lender likely will transfer the money to your bank account within 24 hours of approving your loan request.

What Are the Types of Short-Term Personal Loans?

For a quick and fairly small cash infusion that you'll pay back in a year or less, you're most likely to hear about payday loans or short-term loans from a bank, credit union or online lender.

Short-term loans from online lenders, banks and credit unions will vary in loan amounts, interest rates and payback periods. You can reach out to your own bank or credit union to see if it offers short-term personal loans, or research online lenders to find one that may offer the terms you desire.

A payday loan can provide you with the quick cash you need to make it to your next paycheck, but it's a very expensive option due to its exorbitant interest rates and fees. Many states regulate how much you can borrow with payday loans, and how much lenders can charge in interest and fees—and some states don't allow payday loans at all. That's because people often roll over or reborrow payday loan funds because they can't afford repayment, which can lead to a cycle of skyrocketing debt. Payday loans should only be used as a last resort.

What Are Short-Term Personal Loan Interest Rates?

While a short-term personal loan may seem like a real lifesaver at first, it can be an expensive way to borrow money. Compared with traditional loans, many short-term personal loans come with much higher interest rates.

Interest rates will depend on the lender, the type of short-term loan you take out, and your financial history. While rates vary widely, payday loans may charge up to 400% APR, and that doesn't even include all the possible fees you could pay.

Rates vary by loan type and by lender, so it's important to do your research, compare offers, and find the best interest rate you can qualify for rather than just accepting the first loan offer you get.

Benefits of Short-Term Loans

While they're not usually the best choice for borrowing money, short-term personal loans can be helpful in a pinch. Benefits include:

  • Fast cash: A short-term personal loan can give you quick access to the money you need. If you have an unexpected expense that needs to be paid for right away, these loans could help.
  • No collateral required: In most cases, you don't have to tie up your house, car or another asset as collateral to get a short-term personal loan. You can get the money you need without risking a prized possession.
  • Bad credit OK with some loan types: If you have less-than-stellar credit, you may still get approved for certain short-term personal loans. As long as you have regular income, you shouldn't have an issue getting fast cash.
  • No long-term commitment: You don't have to commit to a short-term personal loan for years—you can get the cash you need, pay it back quickly and move on.
  • Flexibility: Some lenders that offer short-term personal loans are flexible and willing to work with you to design a payment plan suited to your specific needs and preferences. Note that this isn't usually the case for payday loans.

Drawbacks of Short-Term Loans

Short-term personal loans can provide quick cash, but often at a price. Disadvantages of these loans include:

  • High interest rates: Short-term personal loans typically carry higher interest rates than longer-term loans. If you take out one of these loans, you may incur not only high payments but also a large total loan cost.
  • Costly fees: High fees for late payments, origination and other things can quickly add up, making your short-term personal loan costs skyrocket.
  • Not a long-term solution: While a short-term personal loan can help you in a dire situation when you're short on cash, because of its cost and sometimes onerous terms, it's not a long-term solution to your financial hardships.

How a Short-Term Personal Loan Can Affect Your Credit

If you take out a short-term personal loan, it's likely to have at least some effect on your credit. If the lender runs a hard inquiry on your credit to decide whether to approve you for a loan, your credit score likely will go down a couple points.

And if you make even one late payment on your loan, your credit score may take a hit. In addition, because a short-term personal loan will add to your debt load, your credit may be negatively impacted.

If one of your goals is to build credit, a payday loan will not help as these loans are not reported to credit bureaus. However, other short-term loans are typically reported to credit bureaus and could help improve your credit as long as you stay on top of your payments.

How to Get a Short-Term Personal Loan

Getting a short-term personal loan is a fairly straightforward process that involves the following steps.

  • Check your credit score. Checking your credit score will give you an idea of whether lenders will consider you a risky borrower. Of course, the higher your credit score, the better interest rate and terms you're likely to get. If you're unhappy with your score, focus on improving it.
  • Shop around. Not all lenders that offer short-term personal loans are equal. Take the time to shop around and find a reputable lender with positive online reviews and clear terms and conditions that can offer you an interest rate and term you can afford. Check the lender's eligibility criteria to make sure you qualify.
  • Gather required documents: After you've found a lender, you'll need to collect various personal and financial documents such as your driver's license, paystubs, W-2 tax forms and bank statements.
  • Complete the application. The application process for short-term personal loans varies from lender to lender. However, it's often short, can be completed online, and requires you to submit the documents you gathered.
  • Wait for approval. Fortunately, you won't have to wait long to find out whether you've been approved for this type of loan. Many lenders approve borrowers the same day they apply. Once you're approved and agree to the loan, you'll receive your funds. Your lender will likely deliver the money via direct deposit within a few business days.

If your roof starts leaking or your child requires an emergency surgery, taking out a short-term personal loan may be your only option. As long as you shop around for the best interest rates and terms, read the fine print of your contract, and make your payments on time, your experience could be a positive one.

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