What can you do with a short-term loan?

Let’s think about loans as a financial tool. Like any tool, it’s important to pick the right one for the job. If you only need a small bit of cash for a temporary need, like buying the right equipment for a new job, a short-term loan that you repay over a few months could help.

Like anything else, however, they have pros and cons. Some short-term loans may be better for your financial health than others.

Ready to learn more? Let’s go.  

What is a short-term loan and how does it work?

Loans come in all shapes and sizes, but a short-term personal loan is usually one that you’ll repay in 12 months or less. Keep in mind that there’s no official definition of “short-term loan,” so it could be shorter or longer with some lenders. 

Short-term loans are also usually for smaller amounts than multi-year loans like a mortgage. That’s because they’re designed for you to repay them fairly quickly. Ideally, it should be easy for you to fit your monthly payments into your budget. 

A quick word about payday loans and auto title loans, though. They’re still—technically speaking—considered a type of short-term loan, since you typically repay them within a few weeks or months. But it’s best to avoid them if you can because they can turn your financial life sideways really quickly. Predatory loans like these charge very high fees, and are known to have particularly unfriendly business practices.

Common (and smart) uses for short-term loans

One of the biggest advantages of short-term loans is how you can use them for just about anything. They’re very flexible. That said, it’s smart to use your loan for needs, rather than wants. This helps you avoid overextending your budget. 

We all deserve nice things now and then. But one thing that’s extra-nice? Having enough wiggle room in your budget so that when you really need to borrow money, you can afford taking on an extra payment without having to worry about your other bills, too.

Here are a few smart short-term loan examples:

• Filling up your home heating fuel tank for the winter.

• Fixing your car when it breaks down, so you can get to your job. 

• Paying the medical bills if your child is hurt while playing soccer.

• Repairing leaking plumbing in your walls, before it grows unhealthy mold. 

• Evacuating temporarily during a natural disaster like a hurricane or wildfire. 

When a short-term loan might not be a good idea

You’re on the right track if you’re thinking about other options. Short-term loans can solve many problems, but they’re not always the best choice for every situation. 

First, it’s good to think about whether you can afford the loan payments. You can use a loan calculator to help you figure out what those payments might look like. Then, compare it with your budget to make sure your payment would fit.

Next, it’s also good to think about why you’re borrowing the money. Money experts recommend avoiding short-term loans for things that you don’t really need or that aren’t really temporary problems, like:

• Vacations

• Extra furniture

• Shopping sprees

• Ongoing monthly budget shortfalls

Short-term loans vs. other options

A key part of any good decision is knowing your other options. That way, you can be sure that if you choose a short-term loan, it’s the right call.

There are lots of alternatives to short-term loans, depending on your needs and your situation. You may need to get creative, but it could be worthwhile to explore other options. Here are a few to consider: 

• Credit cards: They can be expensive if you don’t make a point of repaying them as soon as you can. But credit cards could be a good option if you’re motivated to repay your balance quickly and only need to borrow a little bit. 

• Payment plans: Some businesses—especially many medical offices—offer payment plans and other financial assistance instead of needing to take out a loan. It doesn’t hurt to ask. 

• Longer personal loans: A personal loan with a longer loan term could fit into your budget better or offer a larger loan amount than you might get with a short-term loan.

• Home equity loan: If you own a home worth more than your mortgage balance, a home equity loan could be a good option for larger borrowing needs. Just be aware that your home secures the loan, so it’s especially important to pay on time to avoid potentially losing your home.

• Loan forbearance: Larger loans, like student loans and mortgages, may offer temporary loan forbearance if you run into short-term financial snags. That can free up room in your budget for other necessities, like groceries. 

• Tap into retirement savings: If you have a retirement savings account, it could be worth checking if you can access those funds for a real emergency. Some accounts, like 401(k)s or Roth accounts, may allow you to borrow or withdraw funds from yourself without paying any penalties, though you will lose out on interest growth of money you take out. 

• Loans from friends and family: Borrowing money from friends and family isn’t a bad option if it’s available to you. But your relationships are more valuable than money, so it’s extra-important to make sure you’re able to repay the cash you borrow. 

How to decide if a short-term loan is right for you

Ready to check whether a short-term loan is really your best option? Here’s a quick, handy checklist you can use:

• How urgent is it? Funding speed can vary a lot between financing options. You might already have a credit card in your wallet, for example. You can often get a short-term personal loan within a few days, while options like home equity loans could take weeks. 

• How much does the loan cost? It’s important to know what the monthly payment will be before you accept any loan, for sure. But it’s also important to know how much it costs over time, and that depends on the loan term length, your interest rate, and loan fees.

• Can you afford it? Your monthly payment should fit within your budget, and it’s best if you still have plenty of room left over in case other surprise expenses crop up. Also ask yourself whether you’re comfortable paying the total financing cost—all interest and fees included—over the long run, too.

• What are your other options? It’s hard to take time to check all of your other options if you need an emergency loan. Still, it only takes a few minutes to research the most common options that might be available for you. 

• What do you need the money for? Some emergency loan uses, like medical bills, often have more affordable repayment options. And it’s best to avoid short-term loans for things that aren’t necessary, like impulse buys.