Short term loans are given usually for periods of two weeks to 1 year. They often do not require a high credit score or even any credit score. They are based on one’s salary and their ability to repay the loan. A simple or fast application process, limited documentation (if any) and a bank account or pre-paid debit card is often all that is required of some lenders. Amounts range from $200 up to $5000. The amount of the loan usually determines the term of the loan product.
Short term loans are categorized by type. Types include installment loans, cash advances or payday loans, unsecured loans, secured loans, student loans, title loans, medical loans, just to name a few. Most short term loans are approved and funded within a few days’ time and offer the convenience of an easy application and extremely fast funding. Some do not even require a traditional credit check. The purpose of them can vary but they are primarily best used to help you quickly and to provide you the cash flow needed for the short term. They are not a solution for the long term and should be used wisely.
Installment type loans are amortized. Meaning with each payment you are paying both interest and principal. This type of short term loan is probably the best to use as you are actually paying down the loan the quickest. One can also accelerate the process by making principal only payments without being penalized, thus decreasing the overall interest that is paid (reducing the cost of the loan). The flexibility of installment type short term loans allow a debtor to “become whole” again in a relatively short period of time. It also teaches some financial responsibility.
Unsecured loan types are short term loans that do not require any collateral. For the lender this type of short term loan can be risky. A lender’s underwriting more than likely will be more robust with this type of short term loan. Because of the larger risk associated with an unsecured type short term loan the amounts usually are less than $1000. These can also be categorized as a payday loan or cash advance loan. Often, the approval process may be as little as 60 seconds. Again, these unsecured short term loans are not a long term credit solution.
Secured loans, such as a title loan, is exactly what they appear to be. The loan is secured by collateral. The collateral in the case of a title loan would be the car itself. The borrower pledges something of value to the lender and should the borrower default, the lender has rights to the pledged piece of collateral. Mortgages, title loans, student loans, auto loans, even a pawn are all secured/collateralized loans. The borrower has much more to lose should they default. Usually what they do is pay the interest only on the loan to extend their time until they have enough money to retrive the loan.
Short term loans are a means to allow one to get over a financial hump. They provide the short term cash needed relatively fast. They should never be used as a long term solution to any credit problem. The interest rates are higher because the risk to the lender is higher but the process is faster for the borrower. So there are both pros and cons to this type of lending product.
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