Stricter finance rules were enacted after the 2009 recession. It is now exceedingly difficult for average people to access bank loans even for secure loans backed by collateral, such as a mortgage or auto purchase. Even credit application rules have become stricter, which leaves many people with little recourse in a market based on credit.
Short-term loans predictably saw an increase in popularity with the credit crisis. There are many reasons why you might need money without delay or the risk of being turned down repeatedly. Several types of short-term loans offer different benefits and terms. Continue reading for more information on this borrowing option available to anyone in need of credit.
Why Choose a Short-term Loan?
The credit bureaus tend to view short-term loans as a sign of risk. Most people don’t realize that this type of loan can negatively damage their credit score. Fortunately, short-term lenders do recognize this, and they usually do not report the loan to credit bureaus except in cases of default. If you have less than stellar credit, these loans may actually work to your advantage. Applying and being turned down for bank loans negatively impacts your credit score.
What Types of Short-term Loans Exist?
Everyone has at least heard of payday loans. These feature an extremely fast application process and a term of two weeks. Less well known are those loans in the same category but with terms ranging up to 12 months. Default penalties on all loans are very similar, and there is no penalty for early repayment.
What Are the Differences Between Payday Loans and Other Short-term Loans?
Interest rates vary considerably between short-term loans due to government regulation. Payday loans are the least regulated and present the annual percentage rate in terms of a fee, which is set at $10 to $15 per $100 of the loan. This amounts to an APR of 391 percent. States have stepped in to provide consumer protections, such as limiting the number of roll-overs on a default and limiting default fees.
12 month loans are limited to APRs within the range of credit cards, which is a maximum of around 30 percent depending on the prime rate. Borrowers are penalized for early payment within a set time; after that period, the loan may be paid in full at any time to avoid extra interest charges.
Do You Need Good Credit to Access Short-term Loans?
Payday loans require no credit check and only basic information, such as references and checking account information. A loan with longer term is either backed by collateral, such as an auto title, or your personal guarantee. A collateral loan is performed without a credit check. Personal guarantees generally do use a credit check to set the interest rate, but a declined application is unlikely depending on the provider.
Whether you need the money to stop a foreclosure fast or take advantage of tax breaks for green home-upgrades, short-term loans provide a wide variety of options for people unable to meet stricter lending requirements. Loan defaults are extremely expensive, so plan for repayment with care!
Joseph White is a freelance blogger who writes about finances and available options for short term loans. If you have poor credit, Joseph recommends getting a 12 month loan. This is an alternative to a payday loan and you can apply here to get one.