What are the pros and cons of short-term loans?

1 year ago

People often opt for short-term loans when requiring fast access to cash which is one of the biggest advantages of these loan types, however, there are some risks associated that need to be considered, too. This guide looks at short-term loans, why people get them and the pros and cons. If you need help and are struggling with repayments, you may look to speak to a money advice charity.

What is a Short-Term Loan?

As the name suggests, a short-term loan is one where the borrower receives the finances rather quickly and is expected to repay it to the lender, with interest, in a short period, usually 12 months or less. Due to the nature of these loans, people often do not require collateral or to have a good credit score upon application. 

There are many different types of short-term loans, with some of the most common ones being payday loans, cash advances or personal loans.

Why do People Get Short-Term Loans?

Often, people who require immediate finance to cover emergency costs, such as medical bills, sudden car costs or any other unexpected bills choose short-term loans as the financing is usually approved quickly. In many cases, borrowers have tried to cut their bills and having done so, then require the help of a short term loan.

What are the Advantages of a Short-Term Loan?

There are many advantages of a short-term loan for people facing unexpected financial strain here are the top 5 pros of short-term loans.

  1. Fast Cash
    Short-term loans often have a quick approval time, sometimes in under an hour, which is useful for people facing emergencies and who require fast cash.
  2. Easier Approval
    Borrower eligibility is often much more relaxed on short-term loans when compared to other loan types, making it more accessible to more people. A great advantage is that short-term loans are often available to people with poor credit scores, who otherwise wouldn’t be approved.
  3. Highly Regulated
    Short-term loans are highly regulated by the Financial Conduct Authority (FCA), which ensures that borrowers are able to make safer decisions and are only given options that lenders are sure that they can afford.
  4. No Collateral Needed
    Borrowers will not be required to put up collateral against their short-term loan, which is a benefit for people who aren’t asset heavy.
  5. Flexibility
    Short-term loans are often flexible and allow borrowers to make flexible repayments, which are also not penalised for making early payments. This depends on the terms and conditions of each lender, so be sure to check the flexibility options of your financial lender first.

What are the Disadvantages of a Short-Term Loan?

If you are considering getting a short-term loan, it is important to be aware of the setbacks, too, as these loans can cause people to fall into a cycle of debt. Here are the top 3 cons of short-term loans.

  1. High Interest
    As a consequence of the accessibility of short-term loans, they are often linked to high-interest rates. The reason for this is also because they are regarded as high-risk to lenders.
  2. Short Repayment Period
    As stated in the title ‘short-term’ loan, the reality of repaying a loan in a short period can be risky and leave people unable to make the repayments on time.
  3. Extra Fees

As these loans are high-interest and required to be repaid over a short time period, the risk of being charged extra fees is significant. For example, late repayment fees can cause people to fall into a cycle of debt, leaving them with a larger loan amount than expected initially.

What to Consider Before Getting a Short-Term Loan

Before deciding whether or not to get a short-term loan, it is important that you first understand the terms and conditions of your lender of choice and ask appropriate questions. You should always ensure that you will be able to make the repayments so that you reduce the chance of falling into a cycle of debt. 

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