What is a Short Term Loan?

Short term loans are offered by different lenders, including payday loan companies and colleges. Short term loans are due within a set amount of time, depending on the lending institution.

Some colleges offer short term loans to students. The borrower must be a student and must be able to show that the loan can be repaid in a certain amount of time, i.e. 60 days. If a student is expected to receive student loans or other student aid, the college may lend a higher amount that would be due upon receipt of the student aid.

Payday loans are offered by many kiosks around cities or via the internet. These are unsecured, high interest loans that are usually due with the deposit of the borrower’s next paycheck. For example, a payday loan company may offer a loan and charge $35 for each $100 borrowed. Of that $35, only $5 goes towards the principal. The company keeps $30 for “fees.”

Banks also offer short term loans. These loans can have a maturity date as early as 60 to 120 days from the date of inception of the loan. Bank short term loans can also mature up to one to three years after the inception of the loan. The terms depend on the bank and the amount of money borrowed.

Many banks may also require collateral, depending again, on the amount borrowed. The smaller the loan, the less apt the lender or bank is to ask for collateral. The application process is a bit longer in that the bank will check the borrower’s credit to be sure the borrower has the ability to pay the loan back. In the case of a small business borrowing money, the lender will review cash flow history and in the case of an individual borrowing money, the lender may require paystubs. They may also look at a borrower’s personal credit score – or in the case of a business, business credit score – to determine whether to grant a short term loan. Banks will also offer short term loans for a lower annual percentage rate than a payday loan service.

If you read the cautionary literature handed out by nonprofit debt management agencies and by consumer advocacy groups, cash advance loans or short term loans in any form may seem terrifying. However, they can provide a lifeline for you if extraordinary circumstances put you in the position of needing cash fast.