written by | May 30, 2022

What are Short Term Loans? Types, Pros and Cons Explained

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The short-term loan can be appealing for those who need cash quickly. When you apply for the loan, receive the cash you need and then pay them back within a short time. This kind of loan comes with shorter repayment terms. The loan amount is disbursed rapidly and is collateral-free and paperless.

But, short-term loans come with potential risks, like higher interest and fees, short repayment terms, and possibly untrustworthy lenders. These loans should be handled with extreme caution. For more information, keep going.

Did You Know?

Specta is an online money lending platform that offers loans of up to ₹50 lacs in one transaction within 5 minutes! There are many other banks in India which offer instant loans. 

Also Read: Government Loan Schemes for Small Businesses In India

What are the Types of Short Term Loans?

There are several different types of short-term loans available. Among these types are Payday loans, Overdraft loans, title loans and personal loans. While some types are only available for certain types of businesses, short-term loans are open to all types of companies. Listed below are a few of the more common uses for these loans. Now that you know what a short term loan is, read on to learn more about each one.

1. Lines of Credit

For those who've already used business credit cards, understanding the purpose of lines of credit for a short-term loan won't be tough. Whenever you borrow an amount, it adjusts monthly instalments for payback. The annual percentage interest rate is typically lower than most other short-term loans.

2. Overdraft Loans

Among the best short term business loans, here’s the second choice. An overdraft loan is a short-term loan taken out from a bank, and it can be used for various purposes, including wages, marketing, advertising and tax payments. An overdraft can also be used for longer-term purposes, such as large-scale expansion.

An overdraft is also less expensive than a traditional loan. These types of loans are often best for businesses experiencing a temporary cash crunch, as the interest rate is typically lower.

Overdrafts are a useful short-term borrowing option for businesses. They allow them to avoid worrying about external cash flow disruptions and will enable them to plan. Overdrafts are also ideal for seasonal businesses because they can be closed at a moment's notice if they don't need the money right away. If you need a short-term loan, you'll need to make sure you're dealing with a legitimate company.

3. Payday Loans

Payday loans are a great option if you require money for an emergency. They're usually easy to apply for, and few requirements are to meet. Typically, you'll just need to present some identification, have a bank account with a steady paycheck and sign a few papers. Besides this, you can't change your mind once you've accepted the loan.

These loans come in many forms. The main one is payday loans, which provide short-term cash until your next paycheck arrives. Payday loans require a fast repayment, and their interest rates can be astronomical. Another option is pawnshop loans, which let you pledge a valuable item as collateral.

If you can't repay the loan, pawn shops can sell the item - but the interest rates and fees are high. Most lenders require a credit check and verifiable income before issuing a short-term loan.

4. Title Loans

If you are looking for a fast way to get a loan with low interest and no prepayment penalty, title loans are a great option. These loans can help you pay for your monthly bills and cover upcoming balloon payments. In addition, many title loan lenders offer more flexible terms than traditional loans, and many offer terms as short as 15 days. However, you must visit a storefront location to finalise the process.

Title loans work by using the title to a borrower's vehicle as collateral. You must have a clear title to the vehicle and be employed in the state where you intend to borrow the money. They will hold on to the title until the debt is paid. It is important to remember that a title loan is not the same as a mortgage.

Also Read: What are the Different Types of Loans in India?

5. Online or Instalment Loans

If you want to apply for a short term loan to get a loan instantly, this 5th platform on our list is a perfect fit. An online loan can be an excellent option for those looking for quick funding or in an emergency cash shortage. Loan approval may take just minutes, and amount disbursing is also fast and simple.

6. Personal Loans

The term "personal loan" describes a loan that you can apply for and use for any purpose. These loans are available from private lenders, credit unions and banks. You can use the money to pay off debt, finance home renovations, or take care of other personal needs. 

However, personal loans do have some restrictions. While they have the potential for high-interest rates, many personal loans are issued with a minimal interest rate.

 

Advantages of Short Term Business Loans

There are several advantages of short-term loans. The interest rates on such loans are low, and it is easier to qualify for them. They are also easy to obtain and repay. Listed below are some of these advantages. 

1. Shorter Time for Incurring Interest

Short-term loans usually have high-interest rates that start around 10%, but as you're paying back in a short time, the overall interest amount you pay in short-term loans is much lesser than the long-term ones. 

2. Quick Funding Time

If you are in need of money right away, easy to repay short-term loans may be the right option for you. Many online lenders offer these loans and can fund your application as little as one day. You can apply online, submit some proof of income and credit and wait for a decision. 

3. Easier to Acquire

When you are looking for an easy loan option, short term loans are an excellent choice. The loan application process is fast and easy, and many lenders have online applications you can complete from the comfort of your home. Even if you have bad credit, most lenders have lenient requirements, so you may be able to qualify. However, you may need to show some evidence of a steady income. 

4. Available to Those With Bad Credit

Many banks and other financial institutions offer credit cards for people with bad credits, and some even include features to help you repair your credit. 

These cards are a secure way to make purchases and improve your credit when used responsibly. However, the APRs for these cards are usually high, so it is important to repay the balance as quickly as possible to avoid hefty borrowing costs. 

Additionally, many credit card issuers offer cash advances. While these are more expensive than unsecured personal loans, they are usually available to those with bad credit.

Disadvantages of Short Term Business Loans

It is important to understand the disadvantages of short term loans before applying for one. Read on to find out why short term loans are not the best choice for your situation.

  • The first disadvantage of short term loans is that they can make you a "seasonal borrower". Instead of planning ahead, you just borrow when you need it. 
  • A short term loan has high-interest rates and high monthly payments. The lenders charge higher interest rates on these loans because they are paid back in a shorter period. 
  • Sometimes, you may spend (or borrow) more than you need to and waste your money. 
  • While these loans may help you establish good credit, they may not be the best choice for a long term loan. 
  • Short-term loans may affect the entity's credit rating that takes them out. Because the loans have short repayment periods, financial institutions are willing to take on greater risks. This can negatively impact the ability of an entity to attract new investments and obtain additional loans.
  • Failure to repay a short term loan can have dire consequences, including a lowered credit score. Therefore, if you are uncertain about payback, consider a long-term loan.
  • Short-term loans also have higher instalments, which can strain a company's budget.

Short-term loans are better if you need a quick fix, but you shouldn't take out a big loan to cover a one-time expense.

Conclusion

Short-term loans are a great way to get the money you need, and there are many perks to getting one. You can expect to pay more for your loan because it's meant to be repaid quickly. But these loans are an excellent source of emergency funds, and they can help you be a standout in your industry.

You can negotiate the repayment terms with the lender, keeping in mind your income and ability to pay. If you’re going to opt for a loan, calculations will matter a lot for you to calculate your business's exact profit and loss.

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FAQs

Q: How many types of short term loans are there?

Ans:

  • Overdraft loans
  • Lines of credit
  • Payday loans
  • Online or Instalment loans
  • Title loans
  • Personal loans

Q: Are short term loan interest rates higher than long term loans?

Ans:

Obviously, because the borrower already pays less interest (overall) in short term loans, the interest rate is higher in short term loans.

Q: What are short term loans and advances?

Ans:

In such a loan, the whole amount is provided to the borrower at one time.

Q: What is a short term loan?

Ans:

Short-term loans are loans that are used to cover short-term cash flow requirements and can be used to meet business or personal requirements. The repayment time for these loans can be between a few days to 5 years, subject to the specifics and the purpose of the loan.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.