Short-Term Loan Options
Sooner or later, everyone runs into financial trouble of some kind.
Whether you car has broken down or you have an unforeseen medical expense, you could very well find yourself in need of a short-term loan.
Consumers in need of a short-term loan have three primary options at their disposal: payday loans, credit card cash advances and personal unsecured loans.
Payday Loans
Payday loans are short-term loans that come with a shorter-than-normal repayment window, typically 14 to 31 days. The idea behind a payday loan is the borrower should be able to repay the loan by his or her next payday.
The steps involved with securing a payday loan are relatively simple. The borrower needs to write a check to the lender for the amount borrowed plus any finance charges. The lender then holds the check until the borrower's next payday.
At the end of the repayment period, the borrower will need to repay the loan plus finance charges in one lump sum. The borrower can pay the lender directly, allow the lender to deposit the check or pay additional finance charges to roll the loan over to another pay period.
Borrowers also can apply for payday loans online by providing his or her banking account information versus a physical check. The amount borrowed then is typically deposited directly into the borrower's account.
In addition to being quick and convenient, payday loans also are available to borrowers regardless of their credit history.
Finance charges associated with payday loans are typically 10 percent to 25 percent of the total value of the loan, including the actual finance charge. These charges can result in very high APRs, which is why it is essential to repay payday loans as quickly as possible.
Payday Loan Example:
- Amount of Payday Loan: $500
- Face Value of Personal Check: $588
- 15 Percent Fee: $88 (459 Percent APR)
- After 14 days, the borrower rolls over the payday loan - a second finance charge of $88 is applied. The borrower then repays the payday loan at 28 days.
- Total Finance Charges: $176 (917 Percent APR)
Credit Card Cash Advance
Credit card cash advances are extended credit in the form of cash. Typically, borrowers can tap into an already owned credit card or can apply for a new credit card that might offer an introductory deal, such as a lower-than-normal interest rate.
Once the cash advance is secured, the borrower then repays the loan in the same manner as he or she would repay standard credit card purchases.
Finance charges associated with a credit card cash advance typically include a 3 percent cash advance fee. Additionally, cash advance APRs - normally greater than 20 percent - are generally much higher than the interest rates for regular purchases.
Credit Card Cash Advance Example:
- Amount of Cash Advance: $500
- 3 Percent Cash Advance Fee: $15
- Total Credit Card Cash Advance Balance: $515
- Cash Advance APR: 21.99 Percent
- The borrower pays the credit card cash advance balance at 31 days.
- Total Finance Charges: $9.44 Plus $15, or $24.44
Personal Unsecured Loan
A personal unsecured loan is essentially like any other loan, only the borrower typically does not need any collateral in order to obtain the loan. The borrower, however, does need to have good credit in order to obtain a personal loan from most lenders.
A personal loan is then repaid in monthly installments.
Many lenders do not charge any fees for personal loans - finance charges typically are limited to the interest applied to the loan. APRs for personal unsecured loans are pretty high compared to other types of loans, such as car loans or mortgages. However, most personal loans do have an APR cap of 36 percent.
Personal Unsecured Loan Example:
- Amount of Personal Loan: $500
- Personal Loan APR: 29.99 Percent
- The borrower repays the personal loan at 31 days.
- Total Finance Charges: $12.50
