Short-Term Personal Loans: What You Need to Know

Short-Term Personal Loans: What You Need to Know

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A short-term personal loan is one that is generally expected to be repaid within a year. Often, they are small-dollar loans, and usually unsecured. If you find yourself in a situation where you need money fast, like an unexpected and expensive car repair, this could be an option for you. Even with bad credit, there’s a good chance that you could qualify for one of these loans — though there are potential drawbacks to be aware of.

Here’s what you need to know about short-term personal loans.

What is a short-term personal loan?

In general, short-term personal loans are designed to be small-dollar and repaid within a year. Many small short-term personal loans have repayment terms that set you up to make payments each week, for a period of up to a year. However, even though many well-known lenders expect year-long repayment, many of them won’t charge prepayment penalties.

Most short-term loans are fast, approving you in a matter of minutes and getting you the money you need within one or two business days. You can use the money for a variety of reasons, including unexpected costs like car repairs or an appliance replacement. It’s also possible to use a short-term personal loan in the case of an unexpected job loss or a medical emergency. For the most part, unless it’s for gambling or college tuition, you can use a personal loan for just about anything, though you should generally avoid using them for items you want rather than need.

It’s important to understand that short-term personal loans can be very expensive, especially if you have bad credit or if you use a payday loan. Interest rates for personal loans can be extremely high for those with poor credit, and payday loans, while providing quick cash, can be so expensive that it’s often better to avoid them if you can and explore payday loan alternatives instead.

Short-term personal loan pros and cons

Before getting a short-term personal loan, it’s important to carefully consider your situation and determine if it’s the right move for you.

Pros

  • Fast funding: The biggest advantage is that you can usually get your money within one to three business days.
  • Easy approval: For some small short-term personal loans, you might not even need to worry about a credit check. Additionally, even those with bad credit can often be approved for these loans.
  • Flexible repayment options: Most of these loans come with flexible repayment options, allowing for weekly or bi-weekly repayment. You can also usually pre-pay without penalties.
  • Available for emergency expenses: If you’re facing an emergency, a short-term loan can provide you with what you need in a pinch.
  • Usually unsecured: In many cases, you don’t have to offer collateral, so you aren’t putting another asset at risk with a short-term personal loan.

Cons

  • Can have high interest rates: In some cases, you might have to pay a high interest rate, especially if you get a short-term payday loan.
  • Might cost more than using a credit card: While you can find low-cost short-term personal loans, some might have higher interest than using a credit card. If you have a 0% APR opportunity or the interest rate is lower, you might be better off with a credit card.
  • Hefty penalties: If you don’t make your payments on time, you could be subject to large penalties that increase the cost of your loan.
  • Not helpful for building credit: Not all short-term lenders report to the bureaus each month. As a result, some small short-term personal loans won’t be added to your credit report, so you might not get any help rehabilitating your credit.
  • Potential to fall into a debt spiral: With short-term loans that allow you to extend for a fee, you might fall into a debt spiral.

Where to get a short-term personal loan

Payday lenders are often the most visible of short-term lenders, with loan terms that are often shorter than a year. Often, you get the loan for two weeks, with the possibility of extending for a fee. Because of how expensive they are, however, payday loans should be avoided if possible.

There are other places to get short-term personal loans, including:

  • Local credit union or bank: You can visit your traditional financial institution to see if it offers small short-term personal loans, and inquire about the terms.
  • Online personal lenders: There are online lenders that offer short-term personal loans. You can find a wide variety of marketplaces offering different loan amounts, terms and interest rates.

Where you get your loan will depend on how much money you plan to borrow, as well as how long you need to pay it back.

Short-term personal loans for bad credit

In general, if you have bad credit, it’s often better to look for other ways of getting money, since you’ll likely end up with high interest rates and unfavorable terms. Instead of borrowing from short-term lenders, you can look for other ways of getting the money you need, such as:

  • Borrowing from friends or family
  • Checking with community resources to see if there are programs to help you meet your needs in other ways, such as by visiting a food bank or enrolling in a utility hardship program
  • Selling unneeded items for cash, if you have a little time
  • Checking to see if your employer offers payday advances, which often come with smaller fees

If you need the loan and have no other choice, consider your options carefully and compare offers from at least three short-term lenders to get the best possible deal. There are options for borrowers with bad credit. Additionally, verify that you’ll actually be able to afford the loan payments before signing anything.

It’s important to understand the consequences if you can’t repay the loan. You could see your credit negatively impacted, and there’s a possibility that you could be sued for repayment. With a judgment against you, your wages could be garnished.

Short-term personal loan agreement template

If you plan to lend or receive short-term personal loans to or from friends and family, it can be a good idea to create a formal agreement. A formal personal loan agreement allows everyone to see what’s expected. It’s a professional way to ensure that all parties remember the agreed-upon terms. You can find short-term personal loan agreement templates at websites like RocketLawyer and Legal Zoom.

In the end, a short-term personal loan can help you out of a jam, but you have to verify that you can afford the payments, no matter where you get the loan.

Miranda Marquit has been a financial journalist for more than 12 years and is a nationally-recognized financial expert specializing in career, investing, financial planning, and small business topics. She has contributed to and been quoted by numerous national and local media outlets, including Forbes, NPR, CNBC, FOX Business, and The Wall Street Journal. She regularly appears on TV, radio, and podcasts to speak about financial topics, as well as speaks at conferences and workshops. Miranda lives in Idaho, where she is working on her MBA — and where she and her son can take full advantage of the outdoor lifestyle.