What is a Short Term Loan?

10 AUGUST 2023

Loans can help us reach our goals and financial dreams in life. Short term loans are one of the types of loans that can help you reach short-term goals, or if you need extra cash that you’ll pay back in a shorter amount of time. Read further to find out more about short term loans.What is a Short Term Loan?

Why would you need a short term loan?

A short term loan is an unsecured loan that can be taken out by anyone. The loan term could be between a few months to a few years, meaning that you would need to repay the loan sooner than a normal personal loan. This type of loan is used for unexpected car or home repairs, managing monthly payments if your income is late, emergency medical bills or if you have no emergency fund.

How does a short term loan work?

A short term loan works much like many other personal loans, however, the main difference is the time frame. It needs to be repaid within a year or a few months, even a few weeks, depending on your type of short term loan. Once you’ve applied for the loan, the lender does a credit check to review your financial history. If your application is accepted, you could receive a loan offer within the hour. This is unlike other loans, where the approval/rejection process takes longer. When you agree to the loan offer, the money would be transferred during the next 24 hours.

Types of temporary loans

When you are needing cash fairly quickly and with a short loan term, temporary loans are what you might need. Short term loans are a type of temporary loan provided by online lenders, banks or credit unions. They have varying loan amounts, interest rates and loan repayment terms.

Another type of temporary loan is a payday loan. This is a type of loan that is designed to help you reach your next paycheck that month. There are quite high fees and interest rates to prevent people from using the payday loan to pay back other debt, which can make matters worse. They have lower principal amounts available to borrow and often money is transferred into your account within the hour of your application approval.

Lines of credit (LOC) is also a type of short term loan, much like a credit card. LOC comes with a credit limit, and the business can tap into the line of credit as needed. It makes monthly installment payments against whatever amount has been borrowed.

Advantages and disadvantages of short term loans



  • Quick money - Get access to cash fast to help you take care of unexpected needs.
  • Unsecured - Short term loans do not need any collateral to be used as security when you apply.
  • Good credit is not always required - Some short term loans can be granted even without a good credit score. Making them easier to acquire.
  • Short-term commitment - Because of the short term loan term, you don’t need to worry about paying back over more than a few years. This means paying interest over a shorter amount of time.
  • Flexible agreements - A few short term loans offer flexible loan agreement terms depending on your specific needs.


  • Higher interest rates - These types of loans have higher interest rates than normal personal loans. This means that you could end up paying higher monthly payments along with a larger total loan amount.
  • Short-term solution - If you’re needing a loan to solve a long-term financial hardship, it might add to your debts and make it a little more difficult to recover from.

How short term loan can affect credit

Like any other loan, a short term loan has some effect on your credit score. Lenders will conduct a hard inquiry check on your credit, which will cause your credit score to drop by a few points. Late or missed payments has the same consequences on short term loans as other loans, by negatively impacting your credit score and adding to your debt-to-income ratio. Payday loans can be used to help build credit as it is not reported to credit bureaus. Other types of short term loans, however, are reported to credit bureaus so make sure you stay on top of your payment schedule.


Before you decide to take out a short term loan, review and compare your options to find one that will suit your needs and requirements. Be sure to assess your credit score, and try to get it in good standing before you apply. Set up an emergency fund as soon as you can so that you have money ready when you need it before having to take out a loan.