Short Term Loans- How Short Should it be?
We cannot always enjoy financial sovereignty throughout the span of life. We are bound to encounter unexpected emergencies that set us back financially. It is imperative to consider other financial options that may boost or help you recover your financial stability. One option is a loan. A loan generally refers to funds that are extended by either an organization or an individual (creditor) to another organization or individual (debtor) at an agreed interest rate and date of repayment that is well evidenced in a promissory note.
Loans may be from either financial lending organizations or from family and friends. Based on their repayment period, loans are classified into two main categories – long term and short term. Long-term loans generally take longer periods of time to mature whereas short-term loans such as payday loans online take only 30 days to mature. Short-term loans are generally taken out to solve immediate financial problems. The processing and approval procedure for these loans is quite fast, allowing you to access the funds in your bank account instantly. These loans help borrowers to remain financially stable in difficult times. The following are different types of short-term loans that borrowers can consider.
Types of short-term loans
Short-term lenders generally offer two types of loans: installment loans and payday loans.
An installment loan refers to a loan extended to borrowers at both personal and commercial levels. Installment loans include any type of loans that are repaid over time with scheduled repayments or a series of installments. This is an advantage for individuals who cannot afford to pay back the loan using a huge chunk of their paycheck all at once. Installment loans may take the form of auto loans, personal loans or even mortgage. Most installment loans have a fixed rate. That means the interest charged over the term of the loan does not change; it remains the same as it was at the time of borrowing.
Due to this, the regular payment amount repaid monthly stays the same throughout the loan term, making it easy for the borrower to budget his finances to fund the loan promptly and make the required payments on time. Mortgage loans, however, vary in that their interest rates can change during the term of the loan. Installment loans can either be collateralized or uncollateralized. Collateralized loans are loans that have security attached to them such that in the event the borrower defaults in payment, the lender can keep the property (collateral) and sell it to pay himself. Unsecured loans, on the other hand, do not have collateral attached to them. Such loans are based more on the borrower’s creditworthiness determined by the borrower’s credit score and proof of income by providing recent paychecks. Installment loans that are secured include mortgage loans and auto loans. When applying for an auto loan, your car is used as collateral while for mortgage loans, you put your house as security. If you default in payment, you lose either your house or vehicle.
Personal loans, on the other hand, do not have collateral attached to them. Instead, the lender checks the borrower’s credit score and proof of income. The borrower’s credit score serves to determine whether he can repay the loan promptly. If the borrower has a bad credit rating, then chances of securing a loan are thin. Consequently, unsecured loans always come with higher interest rates compared to secured loans. This is because the creditor faces more risk of non-repayment from the borrower in unsecured loans so higher interest rates are deemed as a type of security for the lender.
Most people approach installment loans due to its fast processing and approval. Applying for an installment loan is quite easy. To apply for an installment loan, the borrower fills out an application with the lender. The borrower must specify the purpose of the loan. The lender, on the other hand, takes the borrower through the terms and conditions of the loan, the repayment schedule and payment amounts including interest rate and the regular monthly installments. The lender then advises the borrower to make higher down payments and to take out a loan for a longer term to enjoy lower interest rates and lower monthly installments.
For the borrower to qualify for the loan, the lender reviews his creditworthiness to determine the amount of credit to extend. Borrowers are expected to pay other fees in addition to interest charges. These fees may take the form of application fees, loan processing fees and other fees that may accrue such as late payment fees. Due to the advent of the internet, borrowers now have a platform where they can ask for installment loans online.
The borrower is expected to approach a trusted website to kick-start the application procedure. It is easy to be eligible for online installment loans. The first qualification is that you must have a checking or savings account that has been open for at least one month. This is because online installment loans are transferred directly into your savings account. Secondly, you must be at least 18 years or older to apply for an installment loan. Thirdly, you must have a steady and regular source of recurring income. This guarantees that you are in a position to make repayments. You can, however, prove this by providing a recent paycheck stub. Lastly, when applying for an online installment loan, you must provide a valid Social Security Number or Individual Taxpayer Identification Number.
Installment Loans Bad Credit
Most people have a pretty messed up financial past which negatively affects their credit score such that their capacity to borrow in the near future is compromised. Installment loans save you from this circumstance as it approves payday loans for borrowers with a hurt credit score and even for those with no credit. Installment loans can be used to help build credit for people with bad credit as they create a history of prompt repayment over time.
Merits and demerits of installment loans
Installments are an option for many due to the benefits they bring. These loans are instant in their approval and have lower interest rates compared to other forms of traditional lending such as payday loans. Installment loans have flexibility, especially when they are long-term as they are tailored best to match the borrower’s ability to repay the loan. Despite the merits of installment loans, the borrower is at risk of losing his property in the event that he defaults in payment. His credit score is also likely to get hurt.
A payday loan is also referred to as a payday advance. It is a short-term, unsecured loan given to a borrower where he is expected to repay by his next payday. Payday loans are usually associated with high interest rates which are driven by the risk that creditors face in the event that the borrower defaults in making payments. Due to the fact that payday loans are unsecured, no collateral is required. Therefore lenders of payday loans cannot perform collection activities in the event that the borrower can’t pay up.
Payday loans have a simple but quite expensive application procedure which involves the borrower writing a personal check for the amount of money he wants to borrow. The borrower may be expected to make certain fees for the application procedure. Payday loans take a very short time to get processed and be approved. Upon approval of payday loans, the borrower receives the money directly in his savings account. Payday loans have an easy eligibility test which makes it simple for many borrowers to qualify for these loans. Most payday loan lenders require borrowers to provide relevant information on income by providing recent bank statements. This financial information acts as a guarantee that the borrower is in a position to make repayments.
With online payday loans, consumers enjoy fast application. Upon approval, the funds are deposited directly into the borrower’s savings account. When the loan matures, the due repayment amount is electronically withdrawn from the borrower’s account on his next payday. Payday loans have certain merits that appeal to many borrowers.
Advantages of payday loans
- Easy to apply
With payday loans, you do not have to go through long procedures and complex requirements. This makes it easy for borrowers to get a loan. The basic requirements are quite cheap as the lender only requires you to have a stable job and a recurring income to qualify.
- They are instant
Upon filling out an application and having your loan approved, you will have the cash you need really fast. This is made possible by the fact that funds are directly deposited into your savings account.
Payday loans are readily accessible. There are many payday loan companies which are easily accessible throughout many cities which makes the availability of payday loans even more common. Online payday loans make it possible for all borrowers to access payday loans on an online platform through the internet.
Disadvantages of payday loans
- They are expensive
Payday loans are associated with higher repayment compared to other forms of borrowing. This is due to the exorbitant interest rates charged and other fees associated with payday loans. The high interest rates are due to the risk of losing the creditors may face if the borrower defaults in payment.
- Payday loans can harm your credit score
Due to the fact that payday loans are expensive, borrowers are burdened by this high cost and may delay or default in making payments which would have a negative impact on their credit score in the long run.
Why you should not opt for short-term loans
Many borrowers opt for short-term loans so that they can get out of debt quickly. They are oblivious of the demerits that come with short-term loans. The following are some demerits of short-term loans.
- High cost
Short-term loans have high monthly payments compared to long-term loans. For borrowers with bad credit, the cost is even much higher due to the higher interest rates charged. This may drown the borrower further in debt.
- Credit score impact
Due to their expensive nature, short-term loans may force the borrower to delay or default in payment which would adversely affect his credit score, limiting his borrowing capacity in the near future.
- Prepayment penalties
Short-term loans expect the borrower to make payments over time until the date agreed upon this ensures that the lender gets profit in the long run. Upon paying your short-term loan off early, the lender does not profit. To compensate for this loss, the lender imposes very high early repayment penalties on the borrower.
- Loss of property
For borrowers who have taken secured loans, they face the risk of loss of property in the event that they default in making payments. For instance,, in auto loans, the lender can take your car if you do not make the agreed payment within the specified time frame.
Alternatives to short-term loans
Most short-term loans are known to be expensive and this does not work in the favor of borrowers. Before taking out a short-term loan that may turn up to be hectic in the long run, it is imperative that you consider other alternatives that work in your best financial interest. You might consider getting advances from employers at your workplace. These kinds of advances come with lower or no interest rates, reducing the loan repayment amount substantially. You may also approach a payment plan with your creditor. This helps you deal directly with your debt and negotiate with the lender on credit terms and conditions. If settling the debt, on your own seems difficult, approaching a Consumer Credit Counseling Agency may do you some good. This agency helps you work out a debt repayment plan to cover your debts over time.