People usually do not like to continue living under the burden of a loan for many years. Many prefer a loan that can be repaid as quickly as possible.
Also, with a long-term loan, one may end up paying a higher interest than what one thought initially at the time of sealing the loan deal.
Although loan repayment duration depends on the type of loan, usually short-term loans provide finance for the duration that suits your repaying ability and personal circumstances.
So, a short-term loan approval comes for few months if you want to borrow money that you can pay back shortly.
The duration of short-term loans repayment usually ranges between one year and 15 years.
You have the luxury of choosing a short-term loan based on your personal circumstances. For instance, those people with bad credit history will like to take a loan for a few months with a special target of improving their credit score shortly. They can repay the loan in a few months and soon their credit score improves dramatically that enables them to take a new loan at a lower interest rate.
Another instance is when your financial position is weak; then, a short-term loan allows you to repay the small amount in a few years and saves you from burdening your finances for so many years as it happens with longer duration loans.
Another advantage of short-term loans is actually paying low interest rate than on longer duration loans. Though lenders tend to charge higher interest on short-term loans, at the end of the loan term, you pay less interest as compared to larger duration loans.
These are some of the key advantages of short-term loans for borrowers. Banks, financial companies and online lenders are source of short-term loans.
Shortcomings of short-term loans
Short-term loans have a maturity period of less than two years. Many borrowers will 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.
ABB is delighted to give some setbacks that are associated with short-term loans.
High cost: Ensure you can afford the high monthly payment imposed with a short-term loan. Since you are financing a 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.
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 your financing.
You need to lower your risk level as much as possible in order to qualify. To achieve a good credit rating, 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.