Short-term loans are a great way to sort out those little financial emergencies that happen between paychecks.
While it's true that a short-term loan can be more expensive than a medium or even long term loan, you can secure one that has the terms that suit you. Short-term loans offer more flexibility, more choices, and incredibly fast payouts.
Due to the nature of a short-term loan, it's viewed as a lower risk loan. That's why lenders are not as worried about your credit score.
These loans are also perfect for first-time lenders to build up a good credit history. Or for people with bad credit to improve their credit score. Here are ten tips that may help you get the loan that's right for you.
#1) Make sure a short-term loan is the right option
Assess your situation before you do anything else. Taking the wrong loan at the wrong time can land you in hot water financially and damage your credit report. Short-term loans can be very beneficial, so consider the following:
- Is the amount you need between $100 and $2,000?
- Do you need it within the next 24 hours?
- Can you pay it off in less than 12 months?
The trick to short term loans is to borrow small amounts that you know you'll be able to pay off in less than the maximum term. Always pay attention to the lender's terms and rates. Short-term loans can come with nasty penalty fees for late or missed payments.
#2) Choose the right type of short-term loan
Short-term loans come in different shapes and sizes. Some differ in name alone, others have key aspects that set them apart. These are some of the short-term loans you may run into online:
- Instant loans
- Emergency cash loans
- No credit check loans
- Payday loans
Fundamentally they are all short term loans with the only difference being the lender's requirements. The two that stand out most are payday loans and No credit check loans.
Payday loans are usually structured in such a way that you pay back the entire loan including fees, as soon as your salary appears in your account. There are lenders who will offer you longer to pay it back, but you need to keep that in mind if you choose this option.
When it comes to short term loans, lenders tend to be more relaxed about your credit history. This is what makes short term loans more attractive to people with bad credit history.
When it comes to a no credit check short-term loan, lenders are willing to ignore your credit score. What you need to keep in mind, is that these loans often come with very harsh repayment terms and higher fees.
#3) Choose the best lender for your individual needs
With so many lenders out there to choose from, at times it'll be tempting to go with the first one to send you a loan agreement. It's important to do some research before committing to a lender, especially when considering online loan applications.
Whether you choose to go with an authorised deposit-taking institution (ADI) or an alternative lender, it's in your best interests to find one you can trust that will offer you the best possible deal. Look for lenders who are open with what fees they charge and give you the information you need upfront.
Brokers are a good choice when shopping for good loan deals. Applying for multiple loans in a short period of time can negatively affect your credit score, by using a broker you can apply once and receive offers from more than one interested lender.
#4) Choose a lender that offers flexible loan terms
A lender who offers you flexible terms will allow you to choose the amount of money you borrow as well as how long you have to pay it off in. Some lenders will offer you set terms and this is not a bad thing, but it can saddle you with unfavorable fees.
Some online brokers and lenders will offer you a loan onsite loan calculator. This is a great way to see what your monthly installments will look like depending on how long you need to pay off the loan, the loan amount, and in some cases whether you pay it off bi-weekly or monthly.
Beware the sliders! Make sure that the loan calculator factors in the interest rate, establishment fee and monthly account maintenance fees. If it does not, you'll need to check those fees before signing any kind of agreement.
#5) Compare loans based on the Annual Percentage rate and not interest only
Comparing interest rates from different lenders is always a good idea but it may not give you the full extent of the fees you will be paying on your loan. The APR (Annual Percentage Rate) is calculated using the interest rate, establishment fee, and account maintenance fee.
By comparing the APR charged by each lender you will be able to choose the offer that truly costs you less in fees. There are lending institutions that won't charge you interest on short term loans. This will also be reflected in the APR and is a point in favor of non-ADI lenders.
#6) Consider the establishment and account maintenance fees
Authorised deposit-taking institutions such as banks, credit unions, and building societies are allowed to charge you an interest fee on all loans. They will also charge you a once off establishment fee and a monthly account maintenance fee.
Getting a short-term loan from ADIs means you will be charged comparatively low interest fees and regulated establishment and account maintenance fees.
Non-ADIs or alternative lenders can't charge you interest on short-term loans under $2,000. Their establishment fees can't be higher than 20% of the loan amount. They can't charge you more than 4% of the loan amount as a monthly account maintenance fee.
The better your credit score the less you are likely to pay in fees, but short term loans are a good way for people who have a low credit score to improve it drastically.
#7) Don't take out more than you need
Your fees are all calculated as a percentage of the money you borrow. This means that when it comes to short-term loans the less you borrow the better. If you need more than $2,000,you would be better off looking into medium to long term loans. They have longer repayment terms and more favorable fees.
#8) Choose a longer loan term for smaller monthly installments
If you would like to keep your monthly installments to a minimum, choosing a longer repayment period is best. This will mean you pay more in fees in the long run.
#9) Choose a lender that allows penalty free early repayment
Don't let lenders corner you with early repayment penalty fees. These penalties are charged to discourage you from settling your debt early because they lose out on fees if you do. By keeping this option open you can save yourself money in the long run.
#10) Make sure you and your credit score can afford it
At the end of the day, your credit score is how prospective employers, service providers, and rental agencies decide how responsible you are financially. Before you sign a loan agreement make sure you can afford it and that your credit record won't suffer.