Short-term financing is a way to get money fast based off your credit, financial situation, and history with a lender. There are pros and cons to short-term financing, with advantages and disadvantages depending on why you’re getting it and what you’re doing with it.
A sound financial plan goes a long way in maximizing one’s short-term financing. With that said, the risks don’t disappear. Here are is a quick glimpse on different advantages and disadvantages of short term financing:
Advantage: Easier to Apply
There are many advantages and disadvantages of short term financing. The one advantage that weighs the most is the ease of applying. A short-term financing is generally for a smaller amount of money than long-term loans are.
Lenders generally require less information to apply for short-term financing. For instance, the best online payday loans tend to have a faster application process. This means you can find out faster whether you qualify or not and don’t necessarily have to wait very long to access the funds, either.
Advantage: You Don’t Need Good Credit
Some lenders of short-term financing does not rely on credit ratings so much as evidence the loan’s able to be repaid. In many cases, you can have bad credit and still acquire short-term financing although the obvious risk is you aren’t able to cover the loan.
Disadvantage: Timer’s Ticking
You have to make payments on short-term financing fast and consistently. There is no ‘missed payments’ on short-term loans. This increases the pressure on you to make sure those payments happen and that they are on-time. If there are not, you can incur fees and penalties that can cripple your financial situation.
Advantage: You Get Money Quickly
The terms of short-term financing are that you pay it back quickly. This typically means full repayment in under a year. This reassures a lender they can grant you a loan and are going to get it back quicker than long-term financing. This works in your benefit as it does theirs, securing financing for you quickly.
Disadvantage: High Interest Rates
More people qualify for short-term loans. This leniency is what brings higher interest rates. Comparatively, a longer term can guarantee you a lower interest rate. For some, this means paying more due to the shorter term.
Advantage: Repay Your Debts
If you have high-interest debts that have to be handled immediately, you may find short-term financing to be of help. Though going into debt to get out of debt seems counter-intuitive, assuming there’s a way to pay this loan back.
All you’re doing is shifting money around to accommodate debt schedules. If it amounts to the same at the end of the day and saves on interest, there’s nothing wrong with that.
Disadvantage: Long-Term Loans
If your need for financing isn’t time-sensitive, consider a long-term loan instead. This way, the interest rate is lower and you have longer to pay it off.
If you repay early and there aren’t any penalties to do so, this is much more advantageous. That said, this isn’t going to get you cash quickly. For that, short-term financing is better.
Advantage: Early Repayment Discount
Some financial institutions and lenders offer an ‘early repayment discount’. If you make your payments on-time or are paying down your loan faster than anticipated, you may qualify for a reduced interest rate. This isn’t always the case, however. Do check the terms and conditions beforehand.
Disadvantage: Potential for Massive Debt
Any sort of short-term financing is risky, regardless of where you’re pulling from is a loan, credit card, or line of credit. If you do not believe 100% you can repay the debt in full and on time according to the schedule provided, do not accept short-term financing.
You’re risking getting caught in a debt cycle that’s very hard to get out of when you start missing payments or completely fail at reimbursing the loan within the time frame stated.
Advantage: They Build Your Credit
Short-term financing done right builds your credit. If you’re organized and stay on top of the payment schedule, there shouldn’t be any trouble bringing your loan to a conclusion.
Some unfortunately aren’t so organized and can take on more debt that they can quickly. By not watching where things are heading, one can very quickly end up in a hole. Therefore, organization’s key.
Disadvantage: You Have No Revolving Credit
A credit card is kind of like short-term financing, as in you’re taking a short-term loan. This approach, however, allows you revolving credit meaning you’re paying down the balance and are still able to use the loan allotted.
Short-term financing usually relates to a single purchase or sum of money which does not work in the same way. You are immediately assigned your maximum amount of debt, with no revolving credit.
Advantage: It’s There When You Need It
Short-term financing is used most often in emergencies and when unplanned expenses present such as a car repair. It’s a way to get you out of a predicament quickly.
For all of short-term financing’s disadvantages, it’s there when you need it. Just ensure you have a definitive plan to return the loan. That’s it.