Short Term Loan: What It Is, Types, Pros and Cons

Most of us are familiar with traditional loans—mortgages, auto loans, student loans. These can help you make large purchases and typically take many years to repay. However, if you only need to borrow funds for a small amount or a short period of time, a nontraditional loan could be the better solution.

Short-term lending is widely available and can take on different forms. But be especially wary. Many of the most predatory loans are short-term; money traps abound and borrowers need to stay alert and research any option and lender carefully before signing up.

Here’s a rundown of what short-term loans are, how they work—and which red flags to keep in mind.

How do short-term loans work?

At their most basic level, short-term loans are similar to traditional, longer-term loans. You decide how much you need to borrow, apply for the funds from a lender, then repay your debt (and interest) over a predetermined period of time. Lenders may consider your income, debt-to-income ratio (DTI), credit score, and whether you have a co-borrower when considering approval or the interest rate.

However, depending on the type of short-term loan you choose, the risk to the borrower can vary quite a bit.

Some short-term loans are unsecured, meaning they don’t require any collateral. Others require an asset as collateral. Some have repayment terms that are months long, while others are intended just to get you through to the next payday.

Another group of short-term loans might be based on your paycheck schedule; the repayment term can be as short as a few days. Certain payday-based loans have notably higher interest than other options.

Lastly, some banks and fintechs offer short-term cash advance loans to established customers, deposited into your account almost immediately. These loans may be available for only a few days or up to your next expected direct deposit date, though they are often fee- and interest-free.

Types of short-term loans

There are many different short-term loan products to choose from, depending on how much you need to borrow and how long you’ll need to repay the debt. They also vary in how much interest they charge—and how risky they are to the borrower.

Installment loans

The most common type of short-term installment loan is a personal loan. This unsecured form of debt involves applying for a loan through an online lender, bank, or credit union. You can choose the loan amount and repayment term, which may be as short as six months. Even if the loan terms start at one or two years, you usually have the option to repay the debt sooner without penalty.

Once approved—based on factors such as your income, debt-to-income ratio (DTI), and credit score—personal loans can often be funded as quickly as the same business day. You can use these unsecured loans to cover emergency expenses, make a large purchase, or consolidate existing debt. You’ll then repay the debt (plus any interest) in equal installments over an agreed period of time.

Bridge loans

Also known as a swing loan, bridge loans are commonly used in real-estate transactions. These gap loans have repayment terms from just a few weeks to multiple years long, and may either be secured by collateral or unsecured. They are popular among homeowners who need to borrow funds only until they can lock in a more permanent loan solution. For example, bridge loans may be used by someone who is buying a new home but hasn't yet sold their existing house.

Bridge loans can also be used as a form of hard money lending, where the borrower gets funds from a financial institution or private investor by putting up their property as collateral. Hard money lending can help investors bridge the gap when buying, renovating, or flipping a property—but often come with high interest rates, extra fees, and short repayment terms.

Payday advances

Many financial institutions today offer their customers advances on expected paychecks, similar to a small short-term loan. If you regularly receive direct deposit into your account, you may be able to request up to a few hundred dollars whenever you need the cash. The funds will often need to be repaid when your next deposit posts.

These advance loans can be requested 24/7 in many cases, often from a mobile app or web platform. Once approved, the funds are deposited directly into your account in as little as a few minutes. After you’ve repaid the short-term loan (and any applicable fees), you can typically “reuse” the feature again and again as needed.

An example of this is Chime’s MyPay, which gives you access to up to $500 instantly for a $2 fee, or within 24 hours for no fee.

Payday loans

A payday loan is another short-term borrowing solution secured by future wages. These loans, also known as cash advance loans, are offered by payday lenders and have repayment terms of about a month or less.

The amount you can borrow depends on your paycheck history and loan limits offered in your area, often limited to about $500 or less. Unlike other short-term lending options, payday loans generally don’t require a credit check and aren’t necessarily contingent on your ability to repay.

But beware: These loans typically charge a flat fee based on the amount borrowed, often translating to a pricey APR well into the triple digits—levels regarded as predatory by consumer advocates. Some states set a maximum allowable fee. New York State bans them.

Car title loans

Similar to a payday loan, car title loans are secured by your vehicle’s title. Only available to individuals who own their cars outright (meaning there’s no longer a lien on the vehicle), these short-term loans can give you quick access to cash—sometimes as much as 25% to 50% of your vehicle’s current value—in exchange for handing over your car title as collateral.

Like payday loans, car title loan terms usually last only 15 to 30 days or so. As far as short-term loans go, these products also have a comparably high cost, including finance charges, origination fees, processing fees, and even document fees. Factoring in the short nature of this debt, a title loan’s APR can easily reach into the triple digits.

Who are short-term loans for?

Short-term loans are designed for individuals who need to borrow money for only a short period of time. The loans, whether secured or unsecured, can help bridge the gap when buying and selling a home, navigating a job change or big move, or managing a rough financial patch due to unexpected expenses.

However, some of these products are much more limited in terms of how much you can borrow; many payday advances and cash advance loans are limited to a few hundred dollars, for example. And they can come with excessively high interest rates compared to other types of loans.

These loans have an abbreviated repayment term. If you’re thinking about taking out a short-term loan, it’s important to ensure that you can indeed meet the repayment requirements. If you’re expecting a windfall in the near future or just need to make it to payday, this type of loan might meet your needs. If you need cash to cover a big purchase or to consolidate debt, though, a more traditional personal loan could be a better fit and cost less.

Pros and cons

Benefits of short-term loans

Short-term loans may operate differently than traditional debt, but often have benefits that make them enticing.

Get funded quickly

Many short-term loans are designed for borrowers who need cash fast, either to stretch their funds to payday or cover an unplanned bill. You’ll usually find that most short-term loan options offer fast funding, sometimes as quickly as just a few minutes.

When it comes to financial institutions offering cash advance features, for instance, you may be able to request hundreds of dollars in just seconds. Once approved, your funds will be directly deposited into your account and immediately available for use.

Credit isn’t typically a factor

Whether you’re using a cash advance feature, payday loan, or vehicle title loan, you generally won’t need to meet any minimum credit score requirements. These loans are secured by a form of collateral—such as your car or home—eliminating the need to tie them to your credit. This can be a better solution for borrowers who have bad credit or little or no credit history—or those who simply don’t want to impact their credit further with a new loan.

Fees are simple

Some cash advance apps will float your funds at no charge. Of the apps and lenders that do charge, short-term loans often have simple and straightforward fee structures. You will typically pay a flat fee based on how much you borrow, such as $5 per $100 dollars borrowed. Just be sure to calculate how much you’re actually paying in fees once the debt is repaid, and how that APR compares to, say, a credit card. In some cases, taking out a credit card cash advance or looking into other borrowing options may be much more affordable.

Considerations when taking out short-term loans

Short-term loans may be convenient, but they aren’t right for everyone. Here are some things to keep in mind before shopping around.

How much you need to borrow

Short-term loans are often limited in how much you can borrow. Depending on the loan option you choose, you may only be able to borrow up to a few hundred dollars at any given time. This may not be enough to cover a large household expense or an unexpected medical bill.

Whether you can repay the loan in time

The keyword here is short-term loan, meaning you only have a small window to repay the debt. In some cases, that might only be days. If you aren’t sure whether you can cover the repayment when it’s due, consider a longer-term loan or putting the purchase on a credit card and paying over time.

How much you’ll actually pay in interest and fees

Short-term loan fees are sometimes structured differently than traditional loans. When taking out a two-week cash advance, for instance, you might be paying $15 per $100 borrowed. This doesn’t sound like much, until you calculate this out into an annual percentage rate and realize it’s over 400%.

When to consider a short-term loan

Not sure whether a short-term loan is right for you? Here are instances where one might make sense.

You only need the money for a short period of time

Short-term loans are designed for borrowers who can repay their debt in a short period of time. Consider one of these products if you only need cash to make it to payday, only want to borrow funds until a bonus check comes through, or plan to repay the borrowed amount in a few weeks’ time.

You are buying a new house but haven’t sold your old one

Bridge loans can be a saving grace for homeowners who need to move but haven’t yet sold their current home. These short-term loans are often secured by your home’s equity, and allow you to buy a new house while taking your time to market and sell your existing house for top dollar.

Your bank offers an easy, low-cost, or even free cash advance feature

Some financial institutions offer easy cash advance features to existing customers. You may be able to access up to hundreds of dollars with a few clicks in the mobile app. You’ll often receive the funds immediately and then repay them when your next paycheck arrives, sometimes at no cost or with a minimal fee.

Reasons you should avoid short-term loans

Of course, short-term loans are not always a good idea, and for some borrowers, should be avoided.

You can’t repay the debt in the near future

Short-term loan products may have repayment terms as long as a few months—or as soon as a few days. If you’re not able to repay the funds as scheduled, you may be subject to penalties, fees, or added interest. In the case of payday loans, you may need to roll your debt into a new loan, which can compound your interest charges and cost you notably more.

You want the lowest fee possible

A short-term personal loan may have a competitive interest rate, but payday loans, car title loans, and bridge loans often do not. If you’re looking to borrow money with the smallest possible interest rate, consider a traditional personal loan, 0% APR credit card offer, or even tapping into your home equity with the help of a home equity loan or HELOC.

You want to borrow a lot of money

Since short-term loans work to float you cash for an unexpected expense or purchase, they aren’t usually offered in life-changing quantities. If you want to borrow a lot of money, look at home equity loans or large personal loans. Personal loans allow you to borrow as much as $100,000 in many cases, while home equity-based loans enable you to tap into the majority of your home’s owned value.

Alternatives to short-term loans

Now that you’ve read all about short-term loans, you might decide they aren’t actually right for you. In this case, here are a few alternatives to consider, depending on what your plans are for the money.

Opt for a traditional loan

If you need to borrow a lot of money or want a longer period of time to repay the debt, a standard personal loan could be the better option. These loans allow you to borrow as much as $200,000 once approved, with repayment terms as long as 96 months.

Tap into your home’s equity

If you owe less on your home than it’s worth, you have equity in the property, meaning you own a portion of the home’s value. You can use this equity as collateral to borrow with a home equity loan or home equity line of credit (HELOC), which gives you access to a large portion of that owned value. Home equity loans and HELOCs tend to have lower interest rates than unsecured loans, too, though it may take longer to get approved and funded.

Utilize a 0% APR offer

Some credit cards offer 0% APR on new purchases and balance transfers for a certain number of months. If you have a credit card with one of these offers, using that to move your debt around and repay the balance without incurring new finance charges can be a great idea.

TIME Stamp: Short-term loans can be useful but risky

Short-term loans can help you meet immediate financial needs, such as covering an unexpected medical bill or home expense. Most short-term loan options involve fees and finance charges that seem relatively small, but actually far outweigh the rates charged by credit cards and other lines of credit. It’s important to consider the true cost (and risk) you’re taking on before choosing your short-term loan and lender.

Frequently asked questions (FAQs)

Want to know even more about short-term loans? Here are some of the most frequently asked questions.

Which loan is best for short-term?

The best short-term loan depends on how quickly you need funds and how much you need to borrow. If you need to manage a large, unexpected expense, a personal loan can get you cash quickly and often at a competitive interest rate. Some banks offer cash advance features that will lend you up to $500 until your next payday, usually with small fees (if any at all). And credit card cash advances can sometimes be costly, but might be the fastest option if you already have an account open. Payday loans are also quick and not tied to credit—but they come with significant, high costs.

How can you borrow $500 quickly?

If you have a bank that offers cash advance or payday loan features to account holders, this can often be the fastest and cheapest option for borrowing $500 or less. Eligible customers can often apply for short-term loans in minutes online or through the bank’s mobile app, and will see cash in their account in just minutes.

What is the easiest loan to get immediately?

If you need to borrow money immediately, pulling from your existing resources will often be the fastest. This usually means utilizing a cash advance through one of your current credit cards or borrowing from your bank if it offers a payday advance loan. Otherwise, many personal loans offer decisions in minutes online, with funding as quickly as the same business day. You may be able to get cash-in-hand by visiting a title loan or cash advance store, but these loans can be predatory and very costly.

Can you get a three-month loan?

Most personal loans have repayment terms starting as low as six months. If you want to pay off the debt in just three months, though, you can almost always do so without penalty.