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Unfortunately, life isn’t always easy and it’s difficult to predict what’s going to happen to us down the road. Most of us have a basic idea of where we’ll be in the years to come, but the fact is, anything can happen. Some expenses are just too large to justify draining all of your savings. So, in the event that an emergency does arise, it’s always good to know what financial options are available to help you out. Well, if you’ve just experienced an emergency and need a bit of quick cash, short-term installment loans might be a healthier method of dealing with it than say, getting a payday loan. For that matter, even if you haven’t yet had an emergency that requires financial attention, it can benefit you greatly in the future to learn about short-term loans now, just in case you ever do.
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What is a Short-Term Installment Loan?
Generally speaking, a “short-term” loan refers to the process of borrowing a moderate amount of money with the intent of paying it back within a relatively short period of time, usually within one to three years. Loans are granted by various types of creditors, such as banks, credit unions and subprime lenders (for those who don’t qualify at a bank). There are a variety of general loans that come in all shapes and sizes. Short-term loans, however, are usually for $5,000 or under. You can use them to cover whatever expenses you’d like.
In fact, you can use a short-term loan for almost any type of emergency, such as:
- Repairs on your home (leaky roof, damaged appliances, etc.)
- To finance a new vehicle when yours breaks down.
- Repairs on your current vehicle (accidents, mechanical procedures, etc.)
- Medical bills (prescription medication, dental costs, etc.)
- Groceries and other household supplies
- To finance you or someone else’s education (tuition, school supplies, etc.)
So, when you need your short-term loan, you can simply go to your lender and fill out an application, wherein you’ll inform them how much of a loan you’ll require. If approved, you’ll receive the money in your bank account, then pay it back in regular installments, over the course of an agreed-upon payment period. Generally speaking, these installments are made on a weekly, bi-weekly or monthly basis, until the loan is paid in full.
What Are Interest Rates For a Short-Term Loan?
Before we move on to the process of getting a short-term loan, it’s very important to learn about how the payments themselves tend to function. Always consider the fact that lenders are businesses like any other and they need to make a small profit from the exchange taking place. Therefore, on top of each loan payment, a certain percentage of “interest” will also be charged, the amount of which varies from lender to lender. While these interest rates are often lower than those of a typical payday loan, make sure you understand how the one you’re given will affect your finances before you agree to it. If your interest rate is too high, but you don’t realize it, you could end up paying back a lot more than you had planned for.
For a more detailed article about interest rates, click here.
So, if you’ve determined that your regular lender isn’t offering a reasonable enough interest rate for their short-term loans, you can always shop around until you find one that does. Remember, banks aren’t the only lenders in town.
The Loan Application Procedure
That brings us to our next section, applying for the loan itself. All potential borrowers need to go through an application process to determine their level of creditworthiness, the exact details of which also vary from lender to lender. For instance, banks and other traditional financial institutions have a very strict set of guidelines that they need to adhere to when it comes to their borrowers. If a potential client has poor credit, a history of debt problems or an unstable source of income, their chances of qualifying at a bank will lessen, depending on how much of a loan they need. However, there are other kinds of privately funded lenders that cater specifically to borrowers who don’t have good credit or high incomes. So, if you don’t get approved at a bank, know that there are alternatives. Overall, the one thing that every lender wants to be certain of is that their clients are able to pay them back, even if that means decreasing the payments or stretching out the payment period.
So, as we mentioned, every lender’s application and approval procedure will be different in some way. Nonetheless, some general factors that apply to most include, but aren’t limited to a borrower’s credit score, the state of their credit report, income, employment history, etc. They might also examine parts of your financial history, such as your record of debt, if you have any more serious cases like consumer proposals and bankruptcies in your past or if you’ve ever had an account that was put in collections. If your lender determines that the likelihood of you keeping up with your payments is high and that you’ll pay your loan back in full by the designated date, they’ll grant you the money.
What Happens If I Can’t Make My Payments?
This is where borrowers must be very careful about the loan money they’ve been granted. Since short-term loans are often for relatively small amounts, a lot of borrowers don’t consider the financial consequences involved. They fail to take things like interest rates into account and can end up in further debt because of it. So, if you have a loan, but you can’t manage to make your payments on time for whatever reason, it’s known as “defaulting”.
Just like the application process, different lenders have different consequences for when their clients default. If you miss a payment, depending on how much you owe in the first place, your lender might start by charging you a penalty fee and tacking on additional interest. If you continue missing payments, after a certain amount of time, your lender may turn your account over to a collections agency, who will pursue your debt in place of your lender. If the amount you owe is large enough, this can even result in a legal case, wherein a federal judge might order wage garnishment. Since legal proceedings themselves can be expensive and time-consuming, court cases are rare. That being said, they can happen, and if the size of your debt justifies the effort, your lender might just see it fit to sue you.
Secured vs. Unsecured Loans
The vast majority of short-term loans are going to be what’s known as “unsecured” debt, meaning the borrower hasn’t offered any collateral or doesn’t need any to be approved. Collateral refers to a borrower’s assets; pieces of property such as a home or a car, which can be offered up to secure a loan. If a borrower does have collateral, not only will their chances of approval increase, but the lender might give them a larger amount of money and maybe even a lower interest rate.
So, if you require a large short-term loan, using your house, car or another piece of property as collateral might make you more creditworthy. However, it’s extremely important to understand the consequences of defaulting when collateral is involved. If the loan is secured by your assets, but you default for too long, your lender may have the right to seize your collateral to cover the remainder of your debt.
For more information about what happens when you can’t make your loan payments on time, click here.
Why Shouldn’t I Get a Payday Loan Instead?
In some of our previous articles, we’ve talked about the idea of using payday loans and how easily borrowers can get caught up in the trap that accompanies them. While this might not be true for everyone, it does, unfortunately, happen to a lot of people across North America. Payday loan lenders can be found both on the street and online. They are a frequented source of small short-term loans, usually for amounts of $100-1,000. They’re appealing because they require no credit check and have same-day approval. All the potential borrower needs is a source of employment and they’ll have little problem getting approval.
This is where a lot of borrowers get themselves in trouble. Payday loans are usually meant to be paid back within two weeks, the typical pay cycle for many wage-based jobs. Because of that, they also come with extremely high-interest rates, sometimes as much as 500% APR (annual percentage rate). That means a borrower could end up paying hundreds of dollars more for what was initially a very small amount of cash, especially if they don’t manage to pay it back by its original due date. In fact, most Canadian provinces now have very strict policies for how payday loan lenders are allowed to operate and how much interest they can charge. All this to say that if you need a small short-term loan, be extremely careful who you’re getting it from.
Check out our infographic on the payday loan cycle, click here.
Using Your Short-Term Loan for an Emergency
As we mentioned earlier, most short-term loans aren’t going to be for extremely high amounts. More often than not, they’re for a few thousand dollars, which is why they can usually be paid back within a relatively short timeframe. Just enough for a borrower to deal with whatever emergency they have on their hands, then get out of debt quick. So, it’s important to be extremely responsible with the credit you’ve been given. By “responsible”, we don’t just mean making your payments on time and in full (which you should always do). It also means thinking your decision through properly before you sign any contracts. While a 3-year amortization period might seem appealing because it gives you enough time to gather the funds you need, it could also mean you’d be stretching out your debt for longer than is truly necessary.
Want to know about loans and programs that will help you get out of debt? Read this.
Always Manage Your Short-Term Loan Responsibly
In conclusion, it’s clear that short-term loans can certainly be useful for emergency situations or for any other time when you need a bit of extra funding for something that you wouldn’t necessarily be able to afford otherwise. From an emergency situation to a good vacation, as long as you’re being responsible and making your payments on time, you can definitely use a short-term loan to get where you need to go.
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