5 Types Of Short Term Loans
When deciding what type of loan would be ideal for you, you need to understand all your options before you come to a decision. Besides standard long term loans, you also have access to short term loans. In this article, we take a look at the latter type.
What Is A Short Term Loan?
First, you need to understand the short term loan definition. A short term loan is one in which the quantum of the loan is generally less than one year. The advantages of taking a short term loan become apparent when you look at the interest rates available.
The various types of short term loans tend to have a much lower interest rate than long term loans. This means that in the long run, you will be saving money on the interest you pay. For example, if you take a home loan of 10 lakhs with a quantum of 15 years, at the end of the tenure, you would have paid the financier a sum much greater than the 10 lakhs that you borrowed initially. The exact amount depends on the specific interest rate of the loan.
In contrast, short term loans will enable you to save a good sum of money on the interest payments. The trade-off is that they generally have a higher EMI (Equated Monthly Instalment), so you will need to ensure that you have a strong positive cash flow before you decide to take a short term loan. The high EMI ensures that you will pay off the loan early, freeing you from the liability quickly.
Both the low interest rate and high EMI make this type of loan ideal for businesses since they usually have large sums of money coming in regularly. Online short term loans simplify the process and make it even easier to apply for a loan.
Let’s take a look at the types of short term loans available to you:
- Bridge LoansWhen your business is looking for quick short term loans, you should consider taking out a bridge loan. A bridge loan is typically used to cover expenses like manufacturing costs and employee salaries before some expected income is received. You will need to provide your bank with pertinent business details, like valid contracts, to be eligible.
It is also common in the real estate market to cover costs in the interim between buying and selling a house.
- Credit CardCredit cards are a type of instant short term loan. They can be used to procure goods or services based on the promise that the holder of the card will eventually pay for them. Credit cards are usually a good financing option for smaller businesses, providing them with capital whenever they need it.
Usually, most credit card debt can be paid off over a longer period of time, but you can opt to pay off the loan quickly with higher EMIs to avoid paying a high interest. You might even be able to transfer debt from one card to the other to avail of an interest-free period. The specifics of this, of course, depend on the particular financier that you are using.
- Payday LoanPayday loans, also called salary loans, are usually taken out with the guarantee that the borrower will pay off the loan when they get their salary. It is usually an unsecured short term loan, which means that the bank doesn’t take any collateral from you. However, you will have to produce the relevant documents, like previous pay slips to show that you have the means to pay off the loan.
- Bank OverdraftIf you ever find yourself in a financial crisis, overdraft loans are a type of short term loan that are definitely worth looking into. This type of loan allows you to keep using your account even if the balance hits zero. The interest rates on the overdraft facility are typically lower than standard credit loans.
An overdraft loan is a secured loan, which means that the bank will take some collateral against it. This can take the form of a house, stocks and bonds, or fixed deposit accounts.
- Friends And Family LoansAs a last resort, you can turn to friends and family for short term financial help. You might not have to pay any interest on the loan, but you need to tread lightly because it might sour your relationship with them. These days, it’s easy to procure online short terms loans, and you have a wide range of options to exhaust before you consider turning to friends and family
The most important thing to keep in mind when taking any type of loan is to do your research and learn everything you can about the options available to you. Get a personal loan for up to 25 lacs from Bajaj Finserv that comes with an easy approval policy and stop wasting time waiting for that sanction.
Bajaj Finance Limited, the lending and investment arm of Bajaj Finserv group, is one of the most diversified NBFCs in the Indian market catering to more than 6 million customers across the country. Headquartered in Pune, the company’s product offering includes Consumer Durable Loans, Lifestyle Finance, Personal Loans, Loan against Property, Small Business Loans, Home loans, Credit Cards, Two-wheeler and Three-wheeler Loans, Construction Equipment Loans, Loan against Securities and Rural Finance which includes Gold Loans and Vehicle refinancing Loans. Bajaj Finance Limited prides itself for holding the highest credit rating of FAAA/Stable for any NBFC in the country today.