A report from Angus Reid Institute shows that half of Canadians would fail to manage an emergency expense of more than $1,000. So then, what do you do when you face an unexpected expense and need quick cash?
While some can ask family and friends, a viable solution for many is a short-term loan. Short-term loans are available to help anyone with a regular source of income.
Curious to know more? Keep reading to learn about the types of short-term loans and how they can help you in a difficult financial situation.
What Is a Short-Term Loan?
Short-term loans help support a temporary personal or business capital need. This article will focus on short-term personal loans.
Typically, they require little to no collateral. Plus, you can apply for and receive the loan quickly. However, in exchange for the convenience of a short-term loan, you’ll pay high interest rates and fees.
The repayment period is usually a few weeks or months, depending on the type of short-term loan you receive. Short-term loans won’t have a repayment period of more than a year. In a few instances, the repayment period can be up to 18 months.
To apply for a loan, you’ll need the following:
- Government ID
- Proof of employment
- Monthly salary of at least $1,200
Each lender will have its own conditions and terms to meet. But the good news is that short-term loans usually don’t require a credit check. Thus, if you have poor credit, you can still get a short-term loan if you have stable employment.
Now that you understand these loans, let’s look at the different short-term loans available.
Payday Loans
Payday loans are the most popular type of short-term loan. In fact, they were designed to help in an emergency financial situation. The idea was that the lender would provide you with cash while you waited for your next paycheck.
Previously, your paycheck acted as collateral against the amount you borrowed.
These days, since you can apply and receive the funds online, the lender can withdraw the money you owe them directly from your bank account when the repayment is due. In addition, you don’t need to offer collateral upfront as long as you prove stable employment.
However, it’s also possible to provide the lender with a check they can cash on your payday. The lender will accept the principal amount plus interest and fees.
Payday loans are usually available in amounts from $100 to $2,000, with a repayment period of a few weeks. Yet, because of the limited collateral or, in some cases, no collateral, they have high interest rates. Many payday loans have an annual percentage rate (APR) of up to 400%.
If you make a late payment, you will face incredibly high fees that cost far more than the principal loan amount. This could further push you into debt and harm your credit score.
Car Title Loans
A car title loan allows you to use your vehicle as collateral if you already own it outright. Usually, you can borrow up to 50% of the vehicles’ current market value.
But like the terms and conditions of a payday loan, many car-title loans have APRs of 300% and a repayment period of two to four weeks.
Bank Overdrafts
It’s also possible to get temporary coverage from your bank when you lack the funds you need for an emergency expense. You can set up the overdraft limit with your bank in advance to prepare for when you need it.
Overdraft protection can be less expensive than other short-term loans and help you avoid non-sufficient funds (NSF) fees, which are around $50 each.
Your bank or credit union can also extend a line of credit to you in times of need instead of overdraft protection. Lines of credit work similarly to credit cards. It’s only sometimes that they act as short-term rather than traditional loans.
Benefits of Short-Term Loans
Short-term loans have several benefits for consumers.
First, they are easy to acquire. Many short-term loans, especially payday loans, don’t require a credit check. You only need to provide proof of employment and a qualifying bank account.
Plus, because they have fewer requirements than traditional loans, you can receive funds the same day you apply or, at most, within 24 hours. Receiving funds this fast is ideal for an emergency.
Furthermore, there is no long-term commitment and less time for interest to incur. You can get the money you need, pay it back, and be done with the matter within weeks.
Drawbacks of Short-Term Loans
Although quick cash is a massive benefit of short-term loans, it also means high interest rates and costly fees. An APR of 300% to 400% is extreme, considering that the average credit card has an APR of about 20%.
Other traditional loans may have an interest rate of 5% to 10%, especially if you have good credit.
Although you’ll pay less in interest because you’re borrowing a smaller amount, if you miss the payment, you will face high fines, and the interest will incur further. It’s easy to get trapped in a debt spiral even after missing just one payment. Missing a payment will also negatively affect your credit score, making it harder to take out another loan.
Of course, if you need to borrow more than $2,000, you will need to apply for a traditional loan since short-term loans only come in smaller amounts. For example, if you suddenly need a new HVAC system, which can cost between $3,000 and $7,500, you will have to explore other financing options.
Short-Term Loans at Easternloans
Short-term loans can be an excellent solution for those who need extra cash to carry them over until they receive more funds.
Yet, you should always consider your financial situation and weigh the risks before applying for personal loans. You want to ensure you can repay what you’ve borrowed during the repayment period to avoid penalties.
If it’s right for you, get a loan from us at Easternloans today. Simply apply online. It only takes five minutes!