Disadvantages of Short Term Loans

Short-term loans have high monthly payments.
Short-term loans have high monthly payments. (Image: form -3 image by Rog999 from <a href='http://www.fotolia.com'>Fotolia.com</a>)

Short-term loans have a maturity under two years (ReferenceforBusiness.com). Many borrowers would prefer to use short-term financing so they can get out of debt quickly. However, short-term loans do have a number of disadvantages, such as a higher cost per month, greater lender requirements and high penalties for early repayment. As a result, you should tread carefully with short-term financing.

High Cost

Ensure you can afford the high monthly payment imposed with a short-term loan. Since you are financing the principal debt over a shorter period of time, you must pay a bigger chunk of the payment each month than if you were using a long-term loan. Adjust for these high payments as necessary in your monthly budget.

Lender Requirements

Raise your credit score to A rating. Particularly if you are seeking a loan without collateral, a lender needs to see you have a high chance of repaying the debt in order to extend you financing. You need to lower your risk level as much as possible in order to qualify. An A credit rating is above 720 (MortgageQ&A). To achieve this score, make all payments on time for two years.

Prepayment Penalties

Do not refinance your short-term loan. The lender is already giving you a short financing contract, allowing you to pay down the debt without high interest payments over time. As such, the lender needs to ensure they make a profit. If you pay your short-term loan off early, the lender runs the risk of not profiting. To compensate for this risk, the lender may impose very high prepayment penalties. Know that you may not be able to refinance without incurring high costs and a penalty to your credit.

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