Guide to Short term loans

A loan refers to an amount of money provided by an entity, individual or organization to another entity, individual or organization at an interest rate.

Short term loans are recorded on a promissory note which specifies the principal amount of money borrowed, the interest rate charged by the lender and repayment date, among other things. Loans can be long-term or short term depending on the repayment period.

This refers to loan funds that the borrower needs to repay within a short time span. Short term loans mature faster than regular loans. That means the borrower receives funds from the lender more quickly and is expected to repay within a shorter time frame.

Examples of short term loans

Credit cards

This is a type of short-term loan is common for many individuals and small businesses. Here, the buyer purchases goods and services using a payment card provided that the total charge of the transaction does not exceed the maximum credit limit of the card.

In this case, the credit card company pays the supplier and the buyer, in turn, pays the credit card company.

Payday loans

Payday loans or payday advances refer to short-term loans that are unsecured  (meaning they do not have any collateral attached to them) meant to finance people as they wait for their next payday. There is interest in this type of loan.

People often use online payday loans which require immediate attention and their next paychecks are still several weeks away.

Therefore, short-term loans like this require borrowers to have records of payroll and employment to ensure sure they have the means to pay up on their next payday.

Bank overdraft

Overdraft refers to a financial facility provided by the bank where its customers can withdraw more money than what is available in their bank accounts.

Borrowers cannot, however, withdraw any amount as he likes as there is a bank overdraft limit that he should not exceed. The borrower has to agree to pay the interest on the overdraft at an agreed rate.

Personal loans

This refers to relatively small amounts of funds borrowed from the bank to consolidate credit cards or to start a business.

A personal loan does not require any collateral and therefore it is considered an unsecured loan. Personal short term loans have loan limits and interest rates which are basically based on the borrower’s credit rating.

Short term Business Loan

Short term loans for business purposes do not require collateral. Financial institutions will check the borrower’s credit history and credit score before issuing the loan. Borrowers can access various kinds of business loans such as trade credit, credit loans, and bank overdrafts.

These are financial funds that help thriving businesses cover the accounts payable within a shorter period of time.

Why Use Short-Term Loans

Despite the high-interest rates of most short term loans, a short term borrower has lots to benefit from this type of borrowing.

No collateral required

Many short term loans do not require collateral. This means the borrower does not have to put anyone at risk in case he didn’t pay on time.

They are fast

The most common advantage of short term loans is the guaranteed fast application process and its convenience to borrowers. Unlike long-term financing, short term loans provide borrowers with the money much faster, hence helping solve their emergencies or immediate needs.

Shorter repayment time

Short term loans let the borrower get his funds faster. But always remember that as a borrower, you must repay the debt within a shorter period of time.

This means the borrower can quickly repay his short-term loan and solve his financial problems.

They provide the required working capital

Many businesses take up short-term loans to cater for day-to-day operations of the business. Short-term loans come in handy when business revenue falls below the operations expenses. Therefore short term loans ensure that funds are readily available to meet business expenses.