What is a Short Term Loan?

A short term loan is a type of loan that is obtained to support a temporary personal or business capital need. As it is a type of credit, it involves repaying the principle amount with interest by a given due date, which is usually within a year from getting the loan.

A short term loan is a valuable option, especially for small businesses or start-ups that are not yet eligible for a credit line from a bank. The loan involves lower borrowed amounts, which may range from $100 to as much as $100,000. Short term loans are suitable not only for businesses but also for individuals who find themselves with a temporary, sudden cash flow issue.

Characteristics of Short Term Loans

Short term loans are called such because of how quickly the loan needs to be paid off. In most cases, it must be paid off within six months to a year – at most, 18 months. Any longer loan term than that is considered a medium term or long term loan.

Long term loans can last from just over a year to 25 years. Some short term loans don’t specify a payment schedule or a specific due date. They simply allow the borrower to pay back the loan at their own pace.

Types of Short Term Loans

Short term loans come in various forms, as listed below:

1. Quick cash loans

This short - term loan is actually a quick cash money but still works as a loan. The lender with the money the borrower needs. The borrower paid the loan by allowing the lender to access the borrower' s credit base. Each payment period of a borrower shall be given the highest interest rate until the loan is returned.

2. Credit card

Use money in a credit card. A credit limit is established and the enterprise or individual can exploit the credit limit when necessary. It makes payments monthly payments for any borrowed money.

3. Short - term consumer loans

Short - term consumer loans are relatively easy loans. Even major financial units provide them. Limitations are the total amount of loan, plus interest rates, payable once when the borrower arrives at the payday.
Debt payment is usually carried out by the lender who will receive the amount of payment from the borrower' s bank account on the monthly salary. Short - term loans often have very high interest rates.

4. Online or Installment loans

It is also relatively easy to get a short term loan where everything is done online – from application to approval. Within minutes from getting the loan approval, the money is wired to the borrower’s bank account.

5. Invoice financing

This type of loan is made using the receivables of the enterprise - invoices that customers have not paid. The lender will lend money and interest rates based on the number of weeks that invoices are still unpaid.

Advantages of Short Term Loans

There are many advantages for the borrower in taking out a loan for only a brief period of time, including the following:

1. Shorter time for incurring interest

As short term loans need to be paid off within about a year, there are lower total interest payments. Compared to long term loans, the amount of interest paid is significantly less.

2. Quick disbursing time

These loans are considered less risky than long - term loans due to shorter maturities. The ability to repay a borrower' s loan is less likely to change dramatically during a short period of time. Therefore, the time for a loan to be guaranteed by a loan is earlier. So the borrower can get the money that' s needed quickly.

3. Easier to borrow

Short - term loans are for small businesses or individuals with low credit scores. Such requirements are often easier to satisfy, partly because these loans are usually relatively small, compared with long - term loans.

Disadvantage

The main disadvantage of short term loans is that they provide only smaller loan amounts. As the loans are returned or paid off sooner, they usually involve small amounts, so that the borrower won’t be burdened with large monthly payments.

Conclusion

Short - term loans are useful for both enterprises and individuals. For businesses, they can provide a good way to solve pressing problems in cash flow. For individuals, such loans are an effective budget.