What are short-term loans?

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The phrase “short-term loan” typically refers to any amount borrowed or financed that must be paid in a short period. Because this is relative term, however, a short-term loan can have a repayment period from as little as two weeks to as long as five years.

For example, a mortgage loan with a term of five or 10 years is often considered short term, compared to a longer term mortgage loan of 25 or 30 years. Other consumer loan programs have much shorter terms, often characterized by loan terms in weeks or months, rather than years.

Examples of short-term loans

A prime example of a short-term loan is a payday loan. Sometimes called a cash advance loan, a payday loan is typically an unsecured loan with repayment expected on or about the borrower’s next payday, so the loan term is typically only about two to four weeks.

Another example of a short-term loan is a signature loan. A signature loan is an unsecured personal loan offered by lenders that only requires the borrower’s signature and a promise to repay the lender, with no collateral required. Personal and signature loans can have loan terms as short as two- to three-months, though one-year and two-year personal loan terms are not uncommon.

Short-term loans can be found through a variety of lenders such as retail banks, credit unions and finance companies offering a wide range of loan choices, rates and terms. For example, a borrower with an excellent credit rating with a credit history showing responsible use of credit, borrowing money and repaying debt obligations as agreed can often apply for and receive a short-term loan with relatively low rates and fees.

Yet short-term loans are also available for borrowers with less-than-perfect credit, with credit histories that typically include late payments to creditors, delinquencies or defaults. While borrowers with bad credit can obtain short-term financing, their interest rates and terms are often not as favorable as those available to borrowers with excellent credit.

Secured vs unsecured short-term loans

Signature loans and payday cash advances are typically considered unsecured types of financing. However, some short-term loans are secured loans, requiring collateral.

For example, a car title loan is a secured loan where the lender is given a vested interest in a borrower’s vehicle and title. Although the borrower keeps possession of the vehicle, the auto title lender receives the title to the vehicle until the loan is paid off. If the borrower defaults on the title loan, the lender may repossess the vehicle from the borrower. Other forms of secured short-term loans include pawn shop loans, standard automobile loans and many business loans.

Consumers have many options when it comes to short-term financing, from credit cards and direct loans from relatives to personal loans and car title loans. Before obtaining any loan, individual borrowers should first review the costs and benefits of all their options, as well as consult with a knowledgeable financial advisor.

Disclaimer: NetCredit is a direct personal loan provider and does not provide financial advice, nor does it vouch for any vendor or service mentioned on our NetCredit personal finance blog or online consumer loan glossary. Always research and perform due diligence on any service provider or vendor before deciding to use them, and we recommend that you speak with a financial advisor regarding all decisions that will affect your finances.

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