Loan Guide: Everything You Need To Know About Short -Term Loans
A short-term loan is an excellent way to meet your minor cash flow problems. Unlike traditional bank loans (home loans, car loans, etc.) that are usually paid back over several years, the repayment tenure of a short-term loan is just a few months. Hence, the name short-term.
Generally, short-term loans are used to meet emergency cash needs like fixing a leaking roof, purchasing inventory for your business, etc.
How do short-term loans work?
There are several types of short-term loans on the market. However, the working remains more or less the same. The main steps in procuring a short-term loan are:
- The borrower compares the different lenders on the market and chooses their preferred lender.
- The borrower requests a loan amount to the lender. The lender then works out the loan's total cost, which includes the principal and interest on the amount borrowed.
- The borrower agrees to pay back the total amount in full, either as one-payment or in several payments.
- The lender and borrower agree on the repayment tenure that generally ranges from 3 to 12/24 months.
- The lender usually performs a credit check on the borrower before approving the loan.
- Once the loan application is sanctioned, the borrowed amount is credited into the borrower's bank account.
- The borrower starts repaying the loan in the form of EMIs until the amount is repaid in full.
Salient Features of Short-Term Loans
- Simple eligibility and readily available
- Offered to both individuals and businesses
- The loan tenure ranges from three months to one/two years
- The loan amount is fixed based on your eligibility and needs
- The interest rate depends on your credit history and repayment capacity
- Simple and hassle-free documentation
- No collateral or guarantor required (varies based on the lender)
- Tailor-made loans across different categories
- Digital loans available – online application, sanction, and repayment, without the need to visit a lender
Common Types of Short-Term Loans in India
Check out the 6 types of popular short-term loans so that you can make an informed decision when availing short-term finance.
A bridge loan is a short-term loan that helps you meet your emergency cash needs until you can get a bigger loan. Let's explain the need for bridge loans with an example. Say, you want to purchase a new home, but you don't have sufficient funds to make the down payment because you're waiting to sell an old property. You can take a bridge loan to pay for the downpayment and repay the bridge loan with the funds you get from selling your old property.
A bridge loan, in this case, offers two distinct advantages. It helps you seal the deal on the new property without having to wait till you're able to raise funds for the down payment. Second, it also gives you time to get a good deal on your old property. Bridge loans can be taken for any end-use.
Consumer Durable Loans
These are loans taken to pay for a home appliance (fridge, AC, furniture, etc.) or a gadget. Generally, most retailers offer consumer durable loans to make it easy for their customers to pay for the purchase.
Demand loans can help you meet any urgent financial requirements. It's a secured loan as you pledge insurance policies and other saving instruments like NSC to secure the loan. The loan amount sanctioned depends on the maturity value of the pledged collateral.
Overdraft (OD) facility is offered for current account holders. When you avail OD on your bank account, you can withdraw funds from your account, despite not having sufficient cash in it. In simple terms, it helps you borrow money within a specific sanctioned limit. Just like other traditional loans, you are charged interest on the outstanding OD balance.
It’s one of the most affordable ways to obtain interest-free funds for a short period, generally 30 days. Under a trade credit, the lender allows you to pay for a purchase without incurring any extra charges. However, you should repay the borrowed amount in full within 30 days.
Short-term Personal Loans
They are the most flexible of all short-term loans. You can take a short-term personal loan for various needs like travel, home renovation, medical emergency, wedding, higher education, and more.
The eligibility for a short-term personal loan depends on several factors like your credit history and current credit score, income levels, employment, other debts, etc. Short-term personal loans are generally unsecured – meaning you don't have to pledge collateral to pay for the loan.
Besides these six common types, there are several other short-term loans like Advance Salary Loans, Personal Overdrafts, Payday loans, etc.
Few Points to Keep in Mind while Availing Short-Term Loans
Do Fix the Loan Amount
Remember though the loan is readily available, it's not free money, and you have to pay interest on it. So, make sure to analyse your exact requirements and get the right loan amount.
Do repay it on time
While deciding on the repayment tenure, make sure to evaluate whether the EMI fits within your monthly budget. Delayed or missed EMIs leave a long-lasting impact on your credit score. When you repay the loan on time, it boosts your creditworthiness, thereby your credit score. Having a good credit score is essential to get bigger loans in the future.
Don’t go overboard
Thanks to the popularity of digital lenders, P2P lending companies, securing a short-term loan is easier than ever before. The eligibility criteria for short-term loans are also relaxed, making it easy for everyone to get one. The downside of easy availability is that it’s easy to go overboard.
If you are not sure of the loan amount, you can opt for a personal credit line or a credit card to meet recurring expenses.
Don’t take another loan to pay off the first one
Don't fall into the short-term loan debt by taking another one to pay off the first one. Avoid cyclic short-term loans and try to get your finances to meet your various expenses.
Where to borrow short-term loans?
Short-term loans are offered by traditional lenders like banks and NBFCs, as well as digital lending platforms. The easiest way to check the different types of short-term loans available to you is to visit a credit aggregate platform likeCreditMantri.
CreditMantri checks your eligibility and lists out all the best short-term loans matched to your credit profile. You can choose the best loan offer for you, upload the required documents, and get the loan amount within 24 – 48 hours.
Meet your Emergency Cash Needs with the Right Short-term Loan
Short-term loans are an excellent option to meet your various cash needs. However, before you take one, you need to evaluate your repayment capacity to not fall into a debt trap. Irrespective of the type of short-term loan you take, make sure to repay it on time. Late payments not only incur steep penalties but also damage your credit score negatively. Consider the different types of short-term loans on the market, compare lenders, and choose the best offer that fits your needs.