Types of short-term loans

Short-term loans come in a range of forms and are typically repaid within a year or less. These types of loans are often used to cover unexpected expenses or to bridge a temporary financial gap. There are several types of short-term loans, including payday, instalment loans, and personal loans. We’ll take a closer look at these loans below, along with the benefits and risks that come with each.

Payday Loans

Payday loans are used to cover small amounts and are an example of short-term loans that are typically due on the borrower's next payday. These loans are often used to cover unexpected expenses, such as car repair or medical bills. Payday loans are usually offered for less than $1,000 and have a very short repayment period, usually two weeks or less. So what are the benefits?

Benefits:

• Quick access to cash: Payday loans can be obtained quickly and easily, often in as little as 24 hours which is why they’re so popular when it comes to managing an unprecedented expense.
• No credit check: Payday lenders typically do not check the credit of borrowers, making them accessible to those with poor credit, so you can benefit from a loan to help you even if you’ve struggled to manage your money in the past.

Risks:

• High-interest rates: Payday loans often have very high-interest rates, which can make them expensive to repay and could mean you fall further into financial difficulty.
• Short repayment period: The short repayment period of payday loans can make it difficult for borrowers to repay the loan on time, leading to late fees and additional interest charges.

Instalment Loans

In contrast, instalment loans are loans that are repaid over a period of time, usually with a set number of scheduled payments. These loans are typically for larger amounts, such as $1,000 to $5,000, and have longer repayment periods, usually a few months to a year. Examples of instalment car loans include personal loans and student loans. The benefits of instalment loans are:

Benefits:

• Lower interest rates: Instalment loans typically have lower interest rates than payday loans so they may end up not being as expensive or difficult to manage
• Longer repayment period: The longer repayment period of instalment loans gives borrowers more time to repay the loan meaning the loan will be easier to manage, and not as hard on your cash flow.

Risks:

• Higher loan amounts: Instalment loans are typically for larger amounts, which can make them more difficult to repay when added to the rest of your monthly bills
• Late fees: Missing a payment can result in late fees and additional interest charges which can result in the total cost of your loan rising.

Personal Loans

Personal loans are unsecured loans that can be used for a variety of purposes, such as debt consolidation, home improvements, or unexpected expenses. These loans are typically for amounts between $1,000 and $35,000 and have repayment periods of one to five years.

Benefits:

• Flexible use: Personal loans can be used for a variety of purposes, giving borrowers more flexibility in how they use the loan.
• Low-interest rates: Personal loans often have lower interest rates than credit cards which makes them more affordable.

Risks:

• Unsecured: Personal loans are unsecured, meaning they are not backed by collateral. This means if the borrower defaults on the loan, the lender has no way to recoup the money.
• Longer repayment period: The longer repayment period of personal loans can make it difficult for borrowers to repay the loan on time, leading to late fees and additional interest charges.

Short-term loans can be a useful tool for individuals facing unexpected expenses or financial gaps. However, it's important to understand the different types of short-term loans, their benefits, and risks, before committing to one.

Finding a loan that is suited to your circumstances and your financial situation means you can reduce the risk of falling into unmanageable debt.