Due to this Covid-19 pandemic going on, many people are getting out of money and helpless to borrow some amount for their basic needs. To fulfill such needs, one can think about short-term loans.
Define Short-term loan
A loan may refer to small businesses or start-ups that are not eligible for a credit line from a bank. This type of loan involves lower borrowed amounts, which may range from $100 to $100,000. Short term loans are suitable not only for small businesses but also for suitable for an individual who finds themselves with a sudden financial problem.
Why you should consider applying for a short-term loan?
- Shorter time for incurring interest:
As short term loans need to be paid off within about a year, there are very lower total interest payments as compared to long term loans, the amount of interest is significantly less.
- Quick funding time:
These types of loans are less risky compared to loans with longer-term because of a shorter maturity date. The ability of the borrower to repay the loan amount is less likely to change over a short period of time. The time it takes for a lender to process the loan is more precise. Thus, the borrower can obtain the funds more quickly.
- Easier to acquire:
Short term loans are the Guardian Angel of small businesses or individuals who suffer from less than stellar credit scores. The requirements for such loans are generally easier to meet because these are specially designed for comparatively small amounts, as compared to the money usually borrowed on a long term basis.
It is categorized into five types of STL that can be chosen as per the requirements of the borrower.
- Merchant Cash Advance: It’s a kind of cash advance in which the borrower makes the loan payments with the amount given by loan provider by allowing him to access the borrower’s credit facility. For every purchase, some amount will be taken by the lender until the whole amount gets paid.
- Payday loans : Also known as an instant payday loans Wichita KS that is specially designed for emergencies. Its amount is limited to $50-$1000 which you have to repay within 2-4 weeks with high interest.
- Line of Credit: It’s very similar to a credit card but this one is used for business purposes only and repay into small monthly payments. And the amount of EMIs depends upon the expense you’ll do in a month.
Things you must keep in mind before applying for a short-term loan:
High Rate Of Interest:
The rate of interest short term loans is higher than long term loans that is around 8% – 13%. Since it came up with great monthly repayments, it can also affect your personal and professional life as huge money will be needed for paying off your debt.
Risk Of Borrowing Cycle:
Short term loans can be easily acquired hence it can make you a regular borrower. Repayment of the short term loans will become unfeasible. Borrowing more than one time will be considered to balance off your original loan thus it leads to a cycle of debt. It will take you as well as your business at risk. So if you cannot repay the agreed amount, you can find another loan. It will be a huge risk and will cause an inability in various business operations. So a person shouldn’t become dependent on the short term loans regularly because it will create bad effects on your life and your business.
Negative Effect On Credit Report:
Short term loan benefits to building up a credit score. But if you are unable to repay the loan on the scheduled time, then the impact is huge. New debt to the income and the high cost of the new loan will cause a major decrease in the credit rating drastically.
How you can reduce the cost of this loan?
- Always pay at least a minimum amount monthly to maintain your credit score and avoid extra charges.
- If you are unable to repay the amount, then talk to your lender before the due date.
- To avoid forgetting the monthly installment, make it automatic.
- Talk to your loan provider about any discount on paying installments earlier as few offer some great rebates.