What can you do with a short-term loan?

Ever found yourself short of cash and counting the days until your next paycheck? 

Cash flow hitches can be a real headache. After all, you've still got to pay the bills, buy groceries, get gas—all of which require money. 

There are solutions for short-term money problems. One of those is a short-term loan.

What are short-term loans?

Short-term loans are quick fixes for smaller problems. Most short-term lenders expect you to repay your loan in 12 months or less. Others consider loans “short-term” if the repayment term is under two years. Traditional loans are more long-term, on the other hand, typically giving you two to five years to repay. 

You might use short-term loans for:

• Emergency repairs

• School costs

• Paying bills on time (to protect your credit)

• Groceries and gas

• Medical charges

How much can you borrow with a short-term loan? It depends on the lender, but short-term loan amounts are usually smaller than longer-term loans. Again, that's because you're expected to pay the loan back relatively quickly.

Why choose short-term loans?

You might get a short-term loan if you need money in a pinch and don't have emergency savings. Short-term loans can be better than credit cards because they force you to pay them back fast. Credit cards are often designed to keep you in debt with low minimum payments and high interest rates. 

Here are a few scenarios that might call for a short-term loan:

• Your checking account gets hacked and your bank freezes it. If there is suspicious activity, unfreezing it could take a month or two. You might need to borrow for regular costs until you regain access. 

• Your car fails an inspection and needs four new tires costing $800. You don't have the money, so you get a small cash loan and pay it back the next month. 

• Your cat eats a piece of string and has to make an unplanned trip to the vet. You don't have $1,500 to cover the bill, so you get a short-term loan to save your fuzzy friend’s life. 

Those are just a few examples, and you might need to get a short-term loan for a completely different reason. But whatever the case, short-term loans can help you get through the occasional financial blip. 

How to apply for a short-term loan

If you're interested in getting a loan, start by determining your needs—how much you need to borrow and how soon you can repay it.

Some of the things to consider when you're looking at loan options include:

• Minimum and maximum loan amounts

• Loan repayment terms

• Interest rate and annual percentage rate (APR)

• Loan fees

Once you find a lender, applying is usually straightforward. You may be able to check interest rates and prequalify for your loan. You’d do this by answering a handful of questions about your income and bank accounts. Many lenders let you do this with a soft inquiry that won’t impact your credit. Next, complete a simple form and submit any documents the lender requires. 

Expect to provide these items:

• Your name

• Address and phone number

• Email address

• Date of birth

• Social Security number

• Desired loan amount

• Reason for the loan

• Valid, government-issued ID

• Proof of income (i.e., paystubs, W-2s, etc.)

• Explanation for credit blemishes

• Banking information

Some lenders might ask for bank statements. And if your loan is secured, you’ll have to offer something of value as a guarantee that you’ll repay the loan. For example, if you're borrowing against your car, you'd need to provide a copy of the title. 

When you apply for most personal loans, the lender checks your credit score and report. That adds a hard inquiry to your credit file, which can have a temporary negative impact on your credit.  

It's possible to find “no credit check” short-term loans. However, they can be so expensive that they’re difficult to pay back. If the loan is designed for anyone at all—even the riskiest borrowers—the cost will be very high to make up for the fact that some borrowers will fail to repay their loans. Most of these loans are thinly-disguised payday or check advance loans or auto title loans. 

Benefits of short-term loans

Short-term loans have some advantages. If you're wondering exactly what's so good about them, here's a quick rundown.

• Quick approval. You don't have to go to your bank to get a short-term loan. Instead, you can find a lender online or an app on your phone and apply or prequalify in minutes. And depending on the lender, you might get loan approval the same day.

• Fast funding. Lenders that offer short-term loans may be able to put money in your bank account a day or two after approving your request. That's a huge plus if you need cash quickly.

• Smaller loans. Short-term loans typically have lower minimum loan amounts than longer-term loans. So you don't have to worry about borrowing more than you really need. 

• Short payoff. You typically repay a short-term loan within two weeks to one year, so your debt isn’t endless. That's a good thing if you don't want to be carrying debt for the long term. 

Are short-term loans a perfect borrowing option? Not always. 

Depending on your credit rating and the kind of loan you're getting, the interest rate might be higher than you want. The interest rate on a payday loan is typically 400% or more. Personal loans, on the other hand, often have an interest rate between about 8% and 36%. Also, some short-term lenders charge fees that add to your total cost. 

Since the repayment period is short and the cost is high, the payments can be big. If you’re in a financial pinch, you might not have room in your budget for a new loan payment.

If you qualify, it might make more sense to bypass short-term loans and apply for a traditional personal loan instead. The repayment period is usually two to five years, but you can pay it off faster if you want to (especially if the lender doesn’t charge a prepayment fee). A personal loan can get you through a financial emergency and give you the financial breathing room you need. 

Short-term loans to avoid

Some personal loans offer better terms than others. There are a few short-term lending options that you should avoid because they are known to be predatory. Predatory means the terms are unfair or abusive.

• Payday loans (or cash advances)

• Most car title loans

• Pawn shop loans

• No credit check loans

These kinds of short-term loans may be easy to get, but hard to get out of.

Here's the thing. They can be an extremely expensive way to borrow because of the way interest and fees are calculated. Car title loans, for example, can have a 300% APR. 

Even if you're absolutely desperate for funds, that's a steep price to pay for a loan. And if you choose a secured short-term loan and don't pay it back, the lender gets to keep your collateral. 

Say you get a $3,000 title loan. You give the lender your car title as security and agree to pay the money back in six months. Only, you lose your job three months into the loan term and can't pay. The lender might be willing to offer a loan extension, usually for a high price. If not, they can take your car to cover the debt. 

Bottom line? These kinds of short-term loans can pull you into a trap of costly borrowing. You can’t afford to pay the loan off, and every renewal increases your balance.

Alternatives to consider instead of a short-term loan

Short-term loans aren't the only way to get money when you need cash in an emergency. There are a few other possibilities, including these options. 

• Negotiate bills. If you can’t afford to pay utilities or other bills, you might be able to work out an agreement with your creditors. Ask them to accept a partial payment or let you catch up over time.

• Ask friends and family. Your friends or family members may be willing to lend you some money with or without interest. It’s smart to put an agreement in writing and repay as agreed to protect your relationship.

• Ask your employer for a paycheck advance. Your employer might be willing to advance some or all of the money from your next paycheck if you're in an emergency situation. Of course, asking for an advance means disclosing your financial troubles, which might make you uncomfortable.

• Resolve debts. Debt resolution means negotiating with your creditors to lower the amount that you owe. It’s a possible option for someone who can’t afford to repay their debts without some degree of forgiveness. You can talk to your creditors yourself or work with a professional debt resolution company.

• Use a cash advance app. Some apps let you access your pay a couple of days early or take a small loan until your next payday. It’s not an instant option. You need to have already set the app up in advance.

• Use a credit card. If you can, bridge the money gap by putting some expenses on a credit card. You’ll pay interest on the balance until it’s paid off, but it might be cheaper than a short-term loan. A credit card cash advance usually costs more than a credit card purchase, but it may still be cheaper than a payday loan or title loan. 

Talk to a debt consultant if you already have debt that you're struggling to repay. They can listen to your financial situation and help you find the best solution for managing debt.