Short-term loans are great if you need fast money. But, it’s good to know the advantages and disadvantages of this type of loan before applying for one. So, in this article, we will talk about the advantages and disadvantages of this loan type.
What Is A Short-Term Loan?
This type of loan is usually taken for about 6 months to meet the urgent financial needs of the borrower. The approved loan amount differs based on the purpose it’s being used for and what agreement the lender and borrower come to. Within a day, a borrower can expect instant short-term financing once the agreement has been met.
Short-term lenders, especially ones that operate online, offer financing that the borrower can choose to pay off every week, 2 weeks, 3 weeks, and so on for about 6 months. This type of loan is a great way to raise capital for a business’ operational requirements to be met.
Before applying for such a facility, you can read Lamina loans reviews to enable you to know who to work with. You should also know exactly what you are getting into before applying.
Below, are some of the advantages and disadvantages that you can expect from this type of credit facility:
Advantages
The Flexibility
This financing type offers multiple options to choose from. This is great if you don’t have so much cash at the moment but you can tell things will improve financially in the near future. Before applying for this type of loan, the lender and borrower come to an agreement on how the cash will be paid and other necessary things.
Short-Term Commitment
A great thing about this financing is the commitment. Since it is a short term loan, you don’t have to be bothered about being in debt for a long time as long as the loan can be paid within 6 months.
Doesn’t Have Much Time To Build Interest
Another advantage of this type of financing is the lower amount paid as interest rate. Since the debt will normally be paid off within 6 months, there won’t be enough time for the interest payments to increase a lot. For instance, a six year loan could build up interest of about 10%. This means you would have to pay 10% more than you collected. But with a 6 month loan, the interest wouldn’t have so much time to build up. Read https://en.wikipedia.org/ to learn more about interest rates.
Gives Bad Creditors An Opportunity
Since most loans require good credit, people with bad credit histories find it very difficult to get loans. However, short term loaners don’t care as much for your credit history. Proof of a steady income, employment and no outstanding loans is more important to them.
Can Improve Your Credit Score
The last advantage of this financing is that it improves your credit score. As long as the loan is paid within the agreed time, your credit score will be boosted.
Disadvantages
Higher Rate Of Interest
Since this loan is paid in a shorter length of time, the rate of interest is usually higher than what you’ll get from your other financing options. While you pay off long term financing for a longer length of time, a short term one requires you to pay all you were given plus interest in a shorter time. Depending on you, this can be good or bad.
Could Damage Good Credit Score
Even though paying off this type of financing can improve your credit score, it could also make it plummet. If you have a good history, not paying off on time would be bad. If your history wasn’t so good before, this can prevent you from ever getting any loans after. So, before applying for this loan, ask yourself if you can pay it off on time. Click here to learn more about credit scores.
You Could End Up Stuck In A Cycle Of Debt
If you are struggling with a money spending problem, getting this financing may not be so good for you. Some get loans and end up straining the finances kept aside for their necessities to pay it back. This could end up with them always getting loans and causing a never ending cycle.
Conclusion
While getting short term financing can be great for some people, it could also be bad for others. Longer term loans may be better for some, but not so good for others. So before getting any kind of financing, make sure you know the good and the bad to avoid getting yourself into difficult situations.