Short-term loans can have long-term consequences

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Short-term loans can be tempting if you need cash quickly. You simply apply for a loan, get the funds you need, and pay them back in a short amount of time. These loans can be a lifesaver when you’re trying to scrounge together emergency funds for car repairs or medical bills without getting a loan from a bank.

However, short-term loans are fraught with risks—high fees and interest rates, brief repayment periods, potentially unscrupulous lenders—and should be approached with great caution.

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

What is a short-term personal loan?

Short-term personal loans are loans given with little to no collateral that are to be repaid in a year or less, sometimes weeks or months. Most just require proof of employment with a certain monthly salary, a bank account and a driver’s license or other form of ID. Because there is often no collateral and the credit requirements are lower, these loans charge a higher interest rate (up to 400%) and may have other fees and penalties.

Many of these loans can be applied for and received quickly, and there are many providers to choose from. You simply submit your application (usually online) and proof of employment or other credit information, the company reviews it, you sign the contract, and you get your money, often in as little as 24 hours.

Types of short-term personal loans

There’s an array of short-term loan types, each with different characteristics, fee structures and terms. One of the most common is the payday loan, which provides cash for borrowers as they await their next paycheck. Usually the only requirement is a pay stub to prove you’ve got a job. These loans often require prompt payback — as soon as your next paycheck clears — and many come with enormous APRs and fees.

Another type of short-term lending, a car title loan, allows the borrower to use their vehicle as collateral as long as it’s owned outright. These loans usually only pay out a fraction of the car’s market value (usually up to half its worth) and can come with APRs of 300% and repayment windows as short as 30 days.

Bank overdrafts, where customers get temporary coverage from their bank at a hefty interest rate when their accounts lack the necessary funds, are also a form of short-term loan. As are installment loans, where borrowers have regular, frequent payments over a period of time until the principal and interest have been repaid.

Other options include lines of creditlines of credit, which are extended by banks or credit unions to bridge temporary cash flow challenges, and bridge loans, which can be useful during real estate transactions when a new house has been purchased while the other property is still on the market.

Benefits of short-term loans

Short-term loans are easy to get and are appealing to those without savings or credit cards when there is a financial emergency. Many can be applied for and the money received via an online application. And they disburse the money quickly, often within just a few hours.

They are also good for those who don’t have collateral and who may not have the credit score needed to get a traditional loan. Most just require proof of employment, a bank account, and a driver’s license or other form of ID.

Since the terms of these loans are so short, there isn’t the long-term commitment that usually comes with more traditional loans. You get your money, pay it back and then move on.

Drawbacks of short-term loans

Lenders expect their money to be paid back quickly—certainly within a year, usually in just a month or two weeks. You need to make sure you have a solid plan to pay it back within the terms of the loan, because the consequences can cost you even more.

The interest rates on these loans are often very high. For just a few thousand dollars (most lenders won’t offer much more than $10,000 or $15,000 at most), the borrower could be on the hook for an APR approaching 400% or more.

If you are unable to repay the principal within the allotted terms, sizable late fees begin to accrue. And that’s assuming the lender is honest. Some fly-by-night outfits could try to extract even more draconian penalties.

These loans may also affect your credit score, both positively and negatively. Some companies make what is called a hard inquiry on your credit, and you get zapped for that. If you miss a payment or don’t pay off the loan in time, your credit will also be negatively affected.

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

The bottom line

Although short-term loans are convenient and seem like a great way to fix a temporary problem, they come with a lot of risks. The fees and interest rates can top 400% and payback terms can be as little as two weeks. Missing payments will negatively affect your credit score and cost you more in late fees, penalties and interest. This can lead to a cycle of borrowing that is difficult to break out of. Be sure to do your homework and research all your options before you apply for this type of loan.