Short-Term Loan Advantages & Disadvantages

Sometimes, you may find yourself short of finances. Also, if you are running a business, you may have ambitious plans to expand and grow your business, but you lack funds. Either way, one of the simplest ways to get the money that you need is to borrow. You will have a few decisions to make whenever you are preparing to apply for a loan.

For instance, you will have to decide on the length of the term and the amount you need. Both short term and long term loans have their advantages and disadvantages. Here are some of the advantages and disadvantages of short-term credit.

Advantages of Short-Term Loans

Fast Approval

A short-term loan is suitable for people who need quick access to cash. Just like a payday loan, a short-term loan application can be approved within a few hours depending on the lender. In some cases, you will have access to the funds within the same day or the following business day.

You Pay Less Interest

Typically, the longer you owe the lender, the higher the interest you will pay. However, with a short-term loan, you will be paying back everything within a shorter period which means you pay less interest as well. You will still save some money even if the interest rate is higher compared to that of long-term loans.

It Can Help You Improve Your Credit Rating

Unlike the long-term loans, you have a luxury of choosing a short-term loan that will suit personal circumstances. For example, if you have a bad credit history, then you can take a short-term loan for a few months to help you improve your credit score. As long as you repay the loan on time, you will see your credit rating improve.

Offers Flexibility and Reduces Stress

These types of loans provide convenience and flexibility. You can apply for a short-term loan any time of the day since most lenders have websites. You will also avoid the stress of owing the lender money for a longer period and watching the interest accrue which can turn into emotional and psychological torture.

 

Disadvantages of Short-Term Loans

They are High-Cost Loans

Typically, short-term loans attract high-interest rates and high monthly payment. Since you are financing the principal debt over a shorter period, you may end up paying a significant amount of money every month compared to what you will pay if you are servicing a long-term loan.

It Can Have a Negative Impact on Your Credit Score

Although you can use a short-term loan to build your credit score, the consequences can be dire if you fail to repay it on time. Your new debt to income ratio plus the high-cost new loan will drastically bring down your credit rating.

Can Make You Fall into a Cycle of Borrowing

The flexibility, convenience, and easy availability of short-term loans can make you a seasonal borrower. You may find yourself hooked towards borrowing whenever you need some money which is a risky not good. This means that you may end up spending more than you can afford or waste a lot of money.

 

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