advantages and disadvantages of short-term loans

Short-Term Loans: The Advantages and Disadvantages

Especially for new businesses, short-term loans make it possible for them to cover their temporary cash shortfalls. Your small coffee shop, for example, might not attract enough customers in its first few weeks, so you will have to resort to taking out a short-term loan to pay your bills. 

Whatever your reason is for applying for a short-term loan, it definitely comes with advantages and disadvantages. In this post, we enumerate the benefits and drawbacks of getting yourself involved with a short-term loan.

The Advantages

  • Short-term loans can improve your credit history. Since this type of loan has a short repayment period, it’s easier for you to repay the amount of money you borrowed. If you repay it on time, then you can definitely improve your credit history which will help you take out a bigger loan in case you need it in the future.
  • Short-term lenders offer fast approval of a loan. Lending providers have websites and mobile applications that you can easily access through your smartphone which makes it convenient to apply for a loan. And your loan application can be approved within a few hours depending on the lender.
  • Short-term lenders are lenient when it comes to requirements. You don't need to own a credit card for you to borrow money. Unlike the pile of documents you have to submit when applying for a personal loan, short-term lenders will most likely ask for one (1) valid ID, bank statements, and proof of income. This is because the amount you're borrowing isn't as large as the amount you can borrow via personal loans.

The Disadvantages

  • Short-term loans can make you a seasonal borrower. While they are convenient, short-term loans can make you fall into a never-ending cycle of borrowing. Applying for a short-term loan can be made through online facilities, so you’d think that it’s okay to do so as long as you repay your debt on time. 
  • The amount you can borrow is limited. Short-term lenders allow you to borrow as much as ₱20,000, but is this enough to solve your financial dilemma? If the amount isn’t enough, you may end up borrowing the rest of the amount that you need from other lending providers. 
  • Short-term loans can be expensive for long-term projects. Interest rates change, and a short-term loan can be expensive if you have a project that goes on for a long time. If you make a string of short-term loans to fund your long-term project, there’s a possibility that you may have to pay higher interest rates.

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There’s nothing wrong with taking out a short-term loan only if you’re responsible enough to attend to your financial obligations. While the advantages of short-term loans are pretty obvious, you also have to consider their disadvantages before deciding if you’re really going to apply for a loan or not.

If you’re ready to take out a loan, then you can start by comparing the best short-term lending providers via GoBear.