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A look at short term loans and how they work

Talk about loans and what immediately comes to mind for most people are long-term loans such as automotive financing, furniture and fittings financing, mortgages and so on and so forth. Most people think about long-term loans that inadvertently require collateral and a number of years repaying the same. What most people fail to realize is that there are actually different types of loans with different repayment periods. What easily comes to mind are short term loans that can be repaid within 12 months after being approved by a lender. Though short term loans and long term loans are functionally the same, they are slightly different in terms of collateral, interest rates applied and so on and so forth.

What do we exactly mean by a short term loan?

The overriding question for most people is how exactly short a short term loan is. Simply put, all short term loans do not last for the same period of time. There is a short term loan that lasts for two weeks while there are short-term loans that last for 12 months. That aside, irrespective of whatever kind of short term loan you settle for, we can conclusively say and without any shadow of a doubt that a loan that is repaid within 12 months is categorized as a short-term loan.



The collateral question

Considering the fact that short term loans are usually advanced for smaller amounts of money, the issue of collateral is not given as much weight as is the case with long-term loans. In fact, the bulk of short-term loans are unsecured or in cases where collateral is required, the value of the collateral is comparably smaller to that of a long term loan.

The interest rates question

When we talk about interest rates for short term loans, it is informed by a number of factors such as whether security was pledged or not, the term of the loan, the amount of money a person has borrowed and so on and so forth. In essence, if you provided collateral for a short term loan, chances are that you will end up paying a lower interest rate compared to a borrower who never pledged any security.

Loan repayment

It is indeed highly recommended that you meet your loan obligations on time and without defaults to avoid penalties and fees that would further spike your short term loan to the roof. Defaulting on loan repayment not only has a negative impact on the amount of money you ultimately pay but also on your credit report. Defaults do have a negative impact on your credit score and might further injure your chances of getting approved in the future.