Finance

What Are Short-Term Loans and How Do They Work?

What Are Short-Term Loans and How Do They Work

Loans can come in very handy in times of financial hardship. There are many different types of loan, but the most common are short-term loans, also known as payday loans. Short-term loans are favourite among borrowers, because of their flexible repayment terms, low interest rates, and speed. Unlike other types of loan, the application process can be completed and approved in less than a day. Payment can even be sent out on the same day that the initial application was made.

This article will break down what short-term loans, how they work, and how you can get one:

Short-Term Loans

Short-term loans are loans that are paid back over the course of several months to a year. They are called ‘short-term loans’ because of the short terms that they are repaid over. You need to make sure that you’re able to repay a loan before you take one out. If you take a loan out and can’t repay it you could default, which could prevent you from getting any further loans in the future. This could mean that you aren’t able to get a mortgage or might not be able to get your first car on car finance.

Sensible Borrowing

If you are going to take out any type of loan, then you need to borrow sensibly. Unfortunately, many borrowers needlessly take out loans and then find themselves in a lot of financial trouble when it comes time to repay. If you’re wondering, ‘why do people use payday loans?’ then there isn’t really a fixed answer. Some people take them out to pay back other loans, others take them out to get them out of bad financial situations. You need to make sure that you have a good reason for taking out a loan. You shouldn’t take one out just to buy designer clothes or so you can go out and party. Borrow sensibly, and only for necessities or in emergencies.

Check Your Credit Score

If you are going to take out a loan, then the first thing that you need to do is to check your credit score. Your credit score is a number assigned to you by Equifax or Experian, which will help lenders to determine whether you are suitable for a loan or not. If you have a history of not repaying loans and poor financial decisions, this will be reflected by a low credit score. If you haven’t ever borrowed before and have always been on time with your bills, then your score will be high. Lenders usually expect at least a fair to good score. If you have a score that’s very good, then you may be able to get very large loans with low interest rates.

Considering the Options

If your credit score is good enough for you to take out a loan, then you can begin considering your options. There are many different loan companies, so you need to do your research so that you can find the one that’s best for you. Some loan companies are unreliable and charge high-interest rates. Others charge low-interest rates and have good customer service. You can find out which loan companies are good and which aren’t by reading reviews, blogs, and financial journals.

Consider Loan Type

We have already explained what a short-term loan is, but is that really what you need? Before you take out a loan you need to work out which type of loan is best suited to your needs. It might turn out that you need a much larger, longer-termed loan. Short-term loans are usually capped at around $10,000. This means that you cannot exceed that amount. If you need anything larger than that, then you may need to take out a loan with a bank or get a secured loan with an independent lender. Make sure to do your research and find the loan type that’s suitable for you, as there are many different types of loans.

Loan Rates

If you are going to go ahead with a short-term loan, then in addition to researching lenders, you also need to research loan rates. Ideally, you should find a loan with the lowest interest rates possible. Interest is the amount that you pay on top of the money that you pay back. It is how lenders earn money. Because of this, you need to find a lender with the lowest rates possible, so that you can save as much money as possible. High-interest lenders will bleed you dry and may leave you needing to take out another loan just to pay them back.

Loan Application

Once you have found a lender that you’re happy with, you can make your initial application. Make sure that you answer all of the income-related questions properly. If you give false answers, when you are checked with a credit agency, they may not be able to find you and you will be denied. You need to give answers as they show up on your credit report, which as we explained previously you can view for free online. The loan application process may require an additional guarantor if your credit score is extremely low. The loan company will explain this to you when you complete your application, as you usually get approval or denial immediately.

Send Documents

You may also need to send documents to the company so that they can verify your identity. This is more common nowadays since internet and identity fraud is rife. You may need to send in a copy of your passport, birth certificate, and bank statement. This is so that the lender can ascertain that you are who you say you are. This is for your safety, and for theirs. Every year, millions of fraudulent loan applications are made. These can be devastating for the people whose names they are made in and can seriously affect their credit scores. The rigorous checks many lenders have in place are for your safety, so comply with them. Once you have sent in your documents, your application can be approved. 

Taking out a loan isn’t difficult at all, as this article shows. There are many reasons why a person might want a loan, but make sure that you only take one out for the right reasons. Don’t play with your credit score and financial future.

About the author

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Kristi Lopez

Kristi Lopez is working as a professional news editor at The Next Hint, Inc. She is accustomed to finding daily reports. Therefore, this keen working and addiction towards her work, it helps her to find good news.

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