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Everybody sooner or later faces a financial emergency. Whether it be due to a car accident, healthcare expenses, unemployment or something entirely different, most people are not equipped to handle a sudden and unexpected period of financial hardship. In fact, around half of households do not have a few hundred dollars available in the event of such an emergency.
This is why short-term money loans are quite popular with millions of people. Mostly designed as a means for people to bridge gaps in income for a few weeks, short-term loans can assist families in their most difficult times.
With that being said, many wonder whether these short-term loans are right for them. As with any loan, it is always important to consider your own personal circumstances and the terms of the loan being offered before making a decision. However, let’s take a look at whether these loans are a good idea for you or anyone who is struggling to make ends meet.
Before you agree to any terms of a loan, it is vital to understand how the process of short-term loans work.
One major difference between these loans and more traditional ones is the length of time given to repay the loan. Depending on the exact amount borrowed, a short-term loan can have a repayment period of anywhere from two weeks to a year. Most, however, involve terms of three months or less.
For most short-term loans, the amount borrowed is more manageable than that of traditional loans used to purchase homes and vehicles. In most situations, short-term loans can range from as little as $100 to several thousand dollars, depending on your exact needs and income.
In most situations, lenders will insist on verifying specific criteria (more on that below). However, most people will have no trouble finding a lender if they have one or more forms of identification and proof of income.
Depending on this and other factors, the specifics of a short-term loan may be more or less favorable. Interest rates can vary considerably from lender to lender, but most are entirely manageable given the short repayment periods involved.
Before determining whether a short-term loan is the right course of action, you must first figure out whether you’re eligible for one in the first place. The good news is that most people are. You’ll only need a few pieces of information to successfully obtain a loan in most situations:
You could be forgiven if you assumed that all short-term loans follow an identical business model or process. In actuality, there are multiple types of short-term loans available to borrowers depending on the amount needed, their overall financial situation, and other critical factors. Some are based on your actual weekly or monthly earnings, while others are based on the value of assets you can afford to offer as collateral.
There are four main types of short-term loans that cover practically any situation imaginable:
Payday loans are the most common form of short-term loans and usually what many think of when discussing this broader subject. Payday loans are generally the easiest type of loan to procure. They rely almost exclusively on proof of income to secure approval. This means that if you have a stable job and proof of income, your chances of being approved are very, very high.
Secured bad credit loans are another option available for those seeking short-term financial assistance. In theory, these loans may be procured by anybody – regardless of employment status – as long as they can provide collateral to cover the amount of the loan. When traditional lenders are not willing to lend based on bad credit, these secured loans are a viable alternative. Generally speaking, these loans can be both short-term or long-term, and provide borrowers with lower interest rates. However, lenders may evaluate additional criteria based on your current situation and decide not to offer you a secured loan even if you have collateral.
Installment loans are similar in nature to payday loans. In a variety of cases, payday loans and installment loans are offered by the same lenders. So, what’s the difference? Installment loans tend to have more competitive interest rates, longer terms and cover larger amounts than payday loans. In many situations, installment loans are offered to borrowers with a history of using payday loans responsibly. They can also be a bridge of sorts between smaller payday loans and secured loans that require collateral.
Microloans are another oft-overlooked example of short-term lending available to borrowers. Microloans are generally offered only through online mediums and often require specific defined purposes for their use in order to be approved. Platforms such as Kiva, LiftFund and even the Small Business Administration offer microloans for predefined purposes. However, the use of these short-term loans is limited: most are restricted to small business use. If you are looking for short-term funding for a specific business opportunity, though, then microloans are another option to consider.
Knowing what options are available with short-term loans is crucial when bridging the gap between your current financial emergency and the future. There is a wide variety of borrowing options available as previously mentioned, but how much can be borrowed is a big concern for many people.
To a certain degree, it depends on which loan option you use. Many payday loans offer flexible terms based on a combination of your income and the desired length of the loan. Amounts from $100 to $2,000 are the most common extremes offered by lenders. For installment loans, amounts of several thousand dollars are common (with income affecting maximum borrowing amount as well). Secured loans can vary considerably, again affected by your personal income and how much collateral you are able to offer at the onset.
Generally speaking, short-term lenders are not willing to provide borrowers with a loan exceeding one-third of their total income over the duration of the loan. Not only is this a smart tactic on the part of the lender, but a good reminder for borrowers not to attempt to borrow more than they can realistically pay back in a short amount of time.
For those who need a bit of help making ends meet due to unexpected expenses, short-term loans can be a life-raft. Whether illness, injury, accident or surprise is the fault of your money problems, these short-term solutions can be vital in maintaining your day-to-day expenses until better days arrive.
If you are fiscally responsible, then using short-term loans to cover irregular or unexpected costs is a simple and generally risk-free solution. Especially for those who cannot secure loans from traditional lenders, these lifelines make it possible to pay bills and cover costs you wouldn’t otherwise be able to pay.
As such, if you have the means and the intent to pay back these short-term loans, then they can most definitely be considered a good idea when tough times arise.