What Are Short Term Loans?
Almost every consumer will borrow money at some time. Common purchases such as homes and education are often too expensive for the average person to afford without taking out a loan. In some cases, unexpected expenses such as medical bills or the loss of a job may force a consumer to take out a loan. Short-term loans typically describe loans where borrowed funds must be paid back within a year.
Other People Are Reading
-
Short-Term Loan Basics
-
The primary purpose of a short-term loan is to fund an expense when the borrower does not have immediate access to cash, but expects to have access to cash in the near future. For instance, a business might need to take out a short-term loan to pay employee wages as it waits to receive payments from clients. Similarly, a student might take out a short-term loan to cover living expenses until summer when he can repay the loan with summer job income.
Interest Rates
-
Interest rates on short-term loans tend to be higher than long-term loans, which can make short-term borrowing expensive. According to CNN, payday loans are a common type of short-term, small-dollar loan with fees and annualized interest rates approaching 400 percent. Such loans can lead to a dangerous cycle of borrowing and debt accumulation that is difficult to escape. CNN reports that for the average $325 payday loan, the borrower ends up paying $793.
-
Drawbacks
-
While short-term loans can help individuals and businesses get through periods of low cash flow, they have drawbacks. If you take out short-term loans with the expectation that you will have income in the near future, but you don't receive the income you expect, you could be stuck with a loan that you cannot repay. If you miss loan payments, it can damage your credit score and the lender may attempt to collect money from you.
Considerations
-
Considering the high interest rates on short-term debt, it may be wise to avoid taking on short-term loans unless absolutely necessary. If you are borrowing to pay for expenses that you cannot currently afford you should be certain that you will have the cash to pay back the debt in the future. Finding ways to trim a personal budget, such as going out to eat less often, using less electricity, water or gas, and buying fewer luxuries may help you afford necessary expenses without taking on short-term debt.
-
