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Short-term borrowing can be defined as any sort of loan or funding that doesn’t require the borrower to commit to years of repayments. When you need money to solve an immediate financial need, short-term loans are often the most ideal solution in many cases. On the other hand, long-term loans can seem enticing with their larger loans and the potential for lower monthly payments since the payments can be divided into smaller amounts.
Of course, it’s not wise to go applying for multiple loans at once, especially if the lender is going to perform a hard inquiry on your credit. As a result, choosing between a short-term loan or a long-term loan is a decision that many borrowers have to face because applying for both simultaneously could create an overwhelming burden on your routine repayment obligations.
Before you rush into the common route of grabbing the biggest long-term loan you can find, consider the following 10 reasons why short-term borrowing can be the safest and most useful form of funding in many scenarios:
Perhaps the number one reason why short-term loans are useful for so many people is that you can get one even if you have bad credit. Most alternative funding types like direct payday loans and installment loans are short-term agreements, and the lenders who offer them are known for not running credit checks. For direct payday loans, you won’t need good credit – you’ll just need solid proof of income.
As long as you can show identification to prove that you’re over the age of 18, have an active checking account, and can prove that you’ve been receiving a similar minimum amount of income each month during the past couple months, you should have no problem being approved by a short-term payday lender.
Long-term loans ensure that you’re going to be stuck with a monthly or quarterly payment for at least 3-5 years or more. That kind of commitment isn’t something you should rush into, especially if you’re not 100% certain that you’ll be able to make your payments during that time.
However, the real reason why long-term commitments like this aren’t ideal is that they don’t give you the option of relaxing for a while. If you ever wanted to stop working for a year to travel the world – you’re always going to have that debt burden on your back, and your savings will continue to dwindle, even when you’re no longer actively employed.
While short-term financial services often come with higher interest rates and higher monthly payments, the idea is to go ahead and get your debt obligation out of the way instead of dragging it on for years. Any time you lengthen the term of a commitment, completing the intended objective becomes more difficult – and that’s true for just about anything in life.
It’s easier to predict how much expendable income you’re going to have during the next 2-3 months than it is to make that same kind of projection over a 5 or 10-year period. Obviously, it’s still up to you to decide if you’ll be able to make the payments on time for the duration of the loan’s repayment period, as not doing so could have similar consequences to defaulting on a conventional long-term loan.
Lenders that offer short-term funding know that their borrowers need fast access to the cash they’re asking for. Of course, if someone is willing to overlook the higher interest rates and agrees to repay a portion of their upcoming paycheck, they’re probably in need of immediate financial relief.
As such, alternative lenders typically provide multiple ways to receive your money on the same day or within 24-72 hours of approval, including direct deposit and prepaid debit cards. Meanwhile, long-term lenders can be much slower and stringent in their approval and transfer processes.
When you hear about a loan that you can be approved for without a credit check, it can be easy to assume that paying off the loan won’t benefit your credit either. However, some short-term loans will, in fact, report your repayments to the credit bureaus.
Since you’ll be done paying off the loan in a matter of months, you’ll have a fully repaid loan on your report in no time. If you had gone for a long-term loan in that same time frame, you would still have an outstanding open account on your report.
Once you’ve been approved for and have successfully repaid a few introductory, entry-level loans (i.e. direct payday loans), the same lender that gave you that loan might then offer you another loan with a larger loan amount. While you don’t want to become trapped in a cycle of taking out perpetual loans, this is a good option to have if you currently have no other way of being approved for larger loans.
Getting a small payday loan and repaying it quickly could get your foot in the door with a lender who will let you borrow up to $2,500, or more if you have a good-paying job. Essentially, with short-term loans, your job or source of income is everything. So, if you have a good job but you don’t have good credit, starting with a small loan and working your way up with the same lender is a good route to take.
Similar to the old saying “heavyweight problems require heavyweight solutions,” short-term financial problems require short-term solutions.
Sure, you could also fix your urgent financial woes with a long-term loan, but that would be like using a jackhammer to hang a picture on the wall – anything beyond a normal hammer is overkill for the task at hand. Plus, the aforementioned speed of receiving your funds also makes short-term loans optimal for borrowers who need emergency cash.
The “debt trap” is a term that refers to the process of becoming trapped in a cycle of creating new debts to fend off old debt. Basically, you could find yourself applying for debt consolidation loans or using one credit card to pay off another.
The root of this problem begins when you overextend your credit usage. After that, you need to rely on more credit in order to continue paying your bills while still being able to make payments on older debts and live a comfortable life. Short-term loans are great for avoiding this cycle because you can just pay them off quickly and go back to being debt-free.
Imagine that one day you decide you want to buy a house or a vehicle and you need a mortgage or auto loan – a likely inevitability for most people. At that point, if you’ve already taken out a long-term loan, being approved for the amount you need for your new vehicle or home could be much more difficult, especially if you’ve run into problems making your payments on time.
Mortgage and auto lenders will look at how much of your credit you’re already utilizing and will factor in your existing repayments during deliberation. If you had stuck with a short-term loan and paid it off quickly as intended, your credit would actually receive a boost and you’d have no outstanding loan accounts on your report.
Ultimately, if you’re looking for a loan type that can virtually guarantee you’re going to have some money in your hand today or tomorrow, payday loans are the category you need to be looking in.
In fact, some short-term lenders have even been criticized for approving loan applications from people who shouldn’t be approved. Now, you should never apply for a loan that you cannot repay – especially not a large one – but for the sake of illustrating just how easy it is to be approved by some alternative lenders, it’s worth noting that even unqualified applicants are sometimes approved for smaller short-term loans because the approval process is so straightforward and simple.
In a nutshell, if you’ve been gainfully employed for a while and can prove it, you’re probably going to get pre-approved, which brings us to our closing point.
Short-Term Lenders Will Pre-Approve You
Finally, one more reason why short-term loans like direct payday loans can be such a useful form of borrowing is that there’s not a lot of guesswork involved. Payday lenders offer some of the fastest and most reliable pre-approval processes – meaning you can find out in minutes whether you’re going to be approved, and after that, it’s a sure thing as long as your proof of income can be verified. Pre-approval will also take some of the intimidation and stress out of the process because you can be assured that you’re not wasting your time by applying.