A short-term loan is one in which the principle repayment comes due in less than one year. Most loans granted for major purposes -- such as to buy a car or house, pay for college or finance a new business -- are long-term loans. Short-term loans are designed to cover cash flow gaps and provide funds for emergency situations. Because the loan term is shorter, interest rates on short-term loans are usually higher than on long-term loans.
Short-term Loans for Individuals Short-term loans for consumers provide cash between paychecks, cover emergencies and health issues, or even help fund a vacation. Some credit unions and banks lender offer short-term personal loans. However, more common sources of short-term personal loans are payday lenders. These lenders offer short-term cash advances of a few weeks or a few months. Because interest rates can be extremely high and terms can be predatory, many states strictly govern the terms and conditions that pay day lenders can offer.
Although they're not typically referred to as short-term loans, credit cards operate in a similar manner, especially when you get a cash advance. In the case of a credit card, you only pay interest on your credit balance if you don't pay it off at the end of the month. Interest rates for cash advances are usually higher than for credit card purchases.
Short Term Business Loans Businesses often take out short term loans. Banks may issue short-term business loans to finance start-up costs, fund a new project, pay for an emergency repair or cover a short-term gap in cash flow. If a company wants to purchase supplies or inventory on credit, the vendor may issue a short-term loan to the business. These are referred to as short-term notes payable.
What to Know About Short-Term Loans Terms and conditions for short-term loans vary, but they all have one thing in common: higher interest rates. Because you're not holding on to the principal for a long period of time, the lender has to charge a higher interest rate to cover the risk of issuing you the loan. For example, if you take out a $10,000 loan at 3 percent APR and it's due in six months, you'll pay $150 in interest.
Short-term loans become a dangerous proposition if you are not able to pay them back when they're due. Since interest rates are higher on them, it's easy to get bogged down by high interest payments. Before choosing a short-term loan, inquire what the fees will be if you don't repay the principal on time.