What is a Short-Term Loan?

When you need money fast, a short-term loan can provide quick access to funds for unexpected expenses. Unlike traditional loans, which typically have repayment terms of two to five years, short-term loans need to be repaid much sooner—often within a few weeks or months.

While the fast application process and shorter repayment period may be convenient, it’s important to make sure you can comfortably make the payments before you commit to signing the loan agreement. Let’s look closer at how short-term loans work and whether they’re the right financial solution for you.

How does a short-term loan work?

A short-term loan is what it sounds like: a loan that is usually repaid in a short period of time. While the phrase “short term” varies by lender and loan type, most short-term loans require full repayment within a few weeks or months. You can pay some short-term loans back within one to two years.¹

In many cases, short-term loans don’t require an extensive credit review and may be an option if you haven’t qualified for longer-term loans in the past. However, the important thing to remember is that short-term loans often have higher-than-average interest rates and costly fees, which can increase your overall cost of borrowing.²

Short-term loans are often used for immediate financial needs or emergencies, like:

• Medical bills
• Car repairs
• Home repairs
• Utility bills
• Rent payments
• Travel emergencies

As with any loan, getting approved for a short-term loan depends on the lender’s eligibility requirements. They may look at factors like your credit score, income, job and how much money you want to borrow. Even if you meet those basic requirements, it doesn’t mean you are guaranteed to get the loan. Lenders have different ways of considering applicants and might ask for more information.

Before signing a short-term loan agreement, it’s important to review the lender’s terms and conditions carefully. Understanding the repayment terms and how the payments fit into your budget can help you better manage your finances.

Types of short-term loans

As discussed above, short-term loans can help you cover unexpected expenses or a temporary lack of money. Some, like payday or title loans, offer quick cash but come with higher costs and typically have a much shorter repayment period. Understanding the different types of short-term loans can help you make a smart financial decision.

Payday loans

Payday loans are short-term, fast cash loans of up to $500³ that typically require the borrower to repay the lender on their next payday. If approved, you can receive the funds in cash, check, electronic deposit, or a prepaid debit card.

The lender may ask you to write a personal check for the total amount you’re borrowing, plus any extra fees. The lender will hold the check and only deposit it if you fail to make your payment on the due date. In some cases, the lender might request electronic access to your checking account to debit the amount you borrowed.

Taking out a payday loan may seem affordable, but reported sky-high annual percentage rates (APR) can range between 140% to 662%,⁴ making this kind of loan very expensive, especially if the borrower can’t repay. So, it’s best to tread lightly when considering a payday loan as an option.

If you don’t repay the payday loan on the agreed-upon due date, the lender will charge additional fees on top of the loan balance and the already high interest rate, which can add up quickly and make it even more challenging to pay off. Many borrowers roll over their payday loan several times if they do not have the money to pay it back in full, which could lead to a cycle of debt that is very hard to escape.

Title loans

A car title loan uses your vehicle’s title as collateral. With this type of loan, you give the lender the title to your car, truck or motorcycle in exchange for a loan typically ranging from $500–$1,000. Title loans often come with a high APR—sometimes up to 300%—making repayment challenging. If the loan isn’t paid off at the end of the first cycle, borrowers may need to roll it over, leading to additional fees and interest that make it even harder to repay.

Lenders usually require borrowers to own their vehicle outright, but you may find some who offer title loans if you paid off most of your car loan. The repayment period is typically a short turnaround of 15 to 30 days,⁶ and if you fall behind on making your payments, you could risk high fees and losing your vehicle.

Pros and cons of short-term loans

Pros

Some advantages of short-term loans include:

• Different options available: There are a couple types of short-term loans on the market, so you may be able to find the right one for your situation.

• Easy qualification: Some short-term loan options may offer more lenient eligibility requirements that allow you to qualify, regardless of your credit history or income.

• Fast funding: Depending on the lender, you might receive the funds the day you get approved, within 24 hours, or in a few business days.

Cons

If you choose to apply for a short-term loan like a payday loan or title loan, you should consider these common drawbacks.

• Hefty rates and fees: You may have to pay higher interest rates and fees than you would with traditional loans offered through banks, credit unions and other lenders. Depending on how much you borrow and how long it takes you to repay, a short-term loan could cost you a lot more money than other forms of borrowing.

• May not help you build credit: Some short-term loans don’t typically report your on-time payments to the major credit bureaus, so this type of borrowing won’t help you build credit. However, the lender will likely report any missed payments, which could damage your credit score.7

• Short repayment period: Since short-term loans must be paid back quickly, you might find it difficult to make your payments if an unexpected expense comes along, like a medical bill or car repair. Rolling over your payday loan could potentially lead to a cycle of debt, which could make it a risky choice.

Alternatives to short-term loans

If you decide that short-term loans aren’t a good fit for your needs, here are a few alternatives to consider.

Personal loans

Personal loans are offered by banks, credit unions and lenders. If approved, you’ll borrow a lump sum of money and repay it through fixed payments over several months to a few years, depending on the lender. Personal loans generally offer lower interest rates and more favorable terms than other types of short-term loans.

Personal loans can be secured or unsecured depending on the lender, what you qualify for and what fits your needs. A secured loan is backed by something of value you own, like a house or car, called collateral. With an unsecured loan, lenders consider your credit history, income and other factors to determine your creditworthiness and ability to repay the loan. Other lenders may have different ways of evaluating applicants, but at OneMain, we work with a wide range of customer credit scores and take your whole financial picture into account to help you find a loan that’s right for you.

Payday alternative loans (PALs):

Some federal credit unions offer PALs as an alternative to high-interest payday loans. Payday alternative loans typically offer between $200 to $1,000 with 1 to 6-month terms.⁸ They’re a more affordable alternative to payday loans with a maximum interest rate of 28%.⁹ Note that you’ll need to be a member of a credit union to take advantage of this option and there are a number of strict requirements to qualify.

Cosigned loans

A cosigner is someone who agrees to sign a loan or credit agreement along with the primary borrower. Ideally, the cosigner should have a stronger credit history and/or a more favorable credit than you do. Many lenders, including OneMain, have rules about who can qualify as a cosigner—and some lenders do not allow cosigners.

If you have a cosigner, you may be able to take out a traditional personal loan that might fit your budget and help you reach your financial goals with better rates and terms. Remember that the cosigner shares the responsibility of the unpaid loan or credit card balance if you default on your payments.

Is a short-term loan right for me?

A short-term loan can be a helpful way to cover expenses, manage cash flow or take advantage of an opportunity. With a quick application process and fast access to funds, it can be a convenient option when you need money. However, before you sign on the dotted line, make sure you can comfortably repay the loan alongside your other monthly expenses. It’s also wise to shop around, consider all your options and explore alternatives that might fit your budget and financial goals.

Sources/Disclosures

1,2 What is a Short-Term Personal Loan?. Experian
3, What is a Payday Loan?. Consumer Financial Protection Bureau
4 New CRL Map Shows Excessive Payday Lending Interest Rates Still Plague Over Half of U.S. States. Center for Responsible Lending
5,6 How Do Personal Loans Work?. Credit Karma
7 When Do Late Payments Get Reported? Experian
8 Payday Alternative Loans. MyCreditUnion.gov
9 Permissible Loan Interest Rate Ceiling Extended. National Credit Union Administration