Introduction:
Whether as a business or an individual, we all face financial crunches from time to time. A short-term loan during such a period of financial struggles can go a long way.
A short-term loan can be defined as the loan amount that an individual or entity borrows from a financial institution for a short period of time usually from 6 to 12 months to solve their short-term financial need. Usually, short-term loans have a less complex requirement but a higher interest rate compared to a long-term loans.
Now, a business may need a short-term loan during low-season sales, to meet daily expenses, to expand and grow, and more.
On the other hand, an individual may need a short-term loan to cover an unexpected expense.
Whatever the case may be, the following are the advantages of borrowing a short-term loan:
1) Quick Approval:
Short-term loans are usually acquired for quick cash to meet unforeseen expenses. Hence, one characteristic of short–term loans is that they’re approved rather quickly than long-term loans, which require a long application process before being approved.
2) Easy To Acquire:
Short-term loans are a lifesaver for individuals and startup businesses who do not have an excellent credit scores, and banks might not agree to lend them long-term loans.
Since short-term loans are not obtained for huge amounts, there is a lesser risk, and they are easily granted to people even with poor credit scores.
3) Lesser Interest Is Accrued:
As the name suggests, short-term loans are granted for short periods. As compared to long-term loans with lower interest rates that accrue interest over 10 to 30 years, you end up paying lesser interest on short-term loans.
Because even though the interest rate is high, you only pay it over a year or half and end up actually saving money in the long run.
4) Lower Interest On Mortgages:
Short-term loans do not usually have lower interest rates but in the case of mortgages, several mortgage loans offer lower interest rates for the short term.
This way, you accrue interest over a shorter period and pay a lower interest rate.
5) Comes In Handy During Emergencies:
Whether you’re a business or an individual, short-term loans can save you from liquidity problems during emergencies.
Cash flow and capital mean everything for a startup business since the revenue isn’t generated up to maximum capacity.
A startup business requires money to meet day-to-day operational expenses or to even expand the business little by little.
In such cases, short-term loans are a lifesaver since they’re quickly available for you to face any liquidity problems the market will throw at you.
For an individual, a short-term loan can “literally” be a lifesaver in case of unexpected medical expenses.
If you or your family member needs urgent surgery, or someone you know meets with an unfortunate accident, and you don’t have much savings, a short-term loan can be obtained since it gets quickly approved.
6) Improve Your Credit Score:
The credit score algorithm boosts your credit rating by obtaining short-term loans. It is quite difficult to build up a credit score if you’re a startup business or have just moved to the US, and since no one wants to lend you money, you have no idea where to start.
So, short-term loans can be a way for you to start building up your credit score since some lenders are willing to grant you money but at higher interest rates.
Once your credit score has improved, you can later easily obtain long-term loans and that too, at lower interest rates.
7) Predictability:
Short-term loans are acquired for a year or less. You are almost certain what your financial situation will look like in the next 12 months.
In the case of long-term loans, you never know what your financial stability will look like in the next 10 to 30 years.
However, for short-term loans, you can easily determine whether you’ll be able to pay back the lender with your current employment and income.
8) No Collateral Is Required:
Short-term loans do not usually require collateral. Hence, you do not need to have a property or house on the ledge as collateral for the bank for short-term loans.
9) Lower Stress:
Since short-term loans are paid off in a short time and you don’t have to live a decade or two of your life worrying about interest and principal payments, short-term loans comparatively cause lower stress than long-term loans.
Conclusion:
Short-term loans can be helpful for both businesses and individuals. It can be quite a convenient and helpful source of finance if you can pay back the loan on time along with the determined interest.