Short-term loans are financial products designed to address immediate financial needs, typically with repayment periods ranging from 6 to 18 months. These loans are often unsecured, meaning they do not require collateral. Their rapid approval and disbursement make them an appealing option for individuals and businesses requiring quick access to funds.
How Do Short-Term Loans Work?
Short-term loans bridge financial gaps during times of need. For instance, a business facing delayed payments from clients may require funds to maintain operations. Banks, credit unions, and other lenders offer short-term financing to address such situations.
The loan process involves the borrower submitting an application (online or offline), followed by the lender assessing their creditworthiness. Upon approval, the funds are disbursed promptly, enabling the borrower to meet their financial obligations.
Advantages of Short-Term Loans
- Easy Accessibility: These loans typically have lenient approval criteria and faster processing times.
- Lower Total Interest: Due to the shorter repayment period, borrowers pay less interest compared to long-term loans.
- Quick Disbursement: The shorter tenure minimizes risks for lenders, enabling faster approvals and fund transfers.
Disadvantages of Short-Term Loans
- Limited Loan Amount: Borrowers may not be able to secure large sums.
- High Interest Rates: Short tenures often result in higher interest rates, potentially increasing the cost.
- Risk of Debt Cycles: Missing payments may lead to refinancing, extending repayment periods, and accruing more interest.
Types of Short-Term Loans
- Merchant Cash Advances
Borrowers receive funds upfront and repay through a percentage of daily sales. - Lines of Credit
Similar to credit cards, these provide a pre-approved credit limit. Borrowers repay based on the utilized amount, often at lower APRs compared to credit cards. - Payday Loans
These emergency loans require repayment in full (plus interest) on the borrower’s next payday, typically carrying very high-interest rates. - Online Loans
Entirely digital, these loans offer quick application processes and fast fund disbursement. - Invoice Financing
Borrowers use unpaid invoices as collateral, receiving funds based on the outstanding amount while paying interest until the invoices are settled.
Eligibility Criteria for Short-Term Loans
To qualify for a short-term loan, applicants typically need to:
- Be Indian citizens.
- Be employees or freelancers aged 21–60 years.
- Earn a minimum annual income of ₹15,000 (or ₹12,000 in specific cases).
Lenders may have additional criteria, so it’s advisable to confirm requirements with your provider.
Required Documentation
Applicants generally need to provide:
- Proof of identity (e.g., Aadhaar, PAN card).
- Proof of address (e.g., passport, utility bills).
- Salary slips for the last three months.
- Latest bank statements showing credited salary.
- A passport-sized photograph.
Specific documentation may vary by lender.
Application Process for Short-Term Loans
- Visit the lender’s website or app.
- Navigate to the loan section and select “short-term loans.”
- Fill in personal and contact details.
- Upload required documents.
- Submit the application and await approval.
Conclusion
Short-term loans provide a quick and convenient financial solution, but they come with specific risks. Carefully review the terms and conditions, evaluate your repayment capacity, and compare options before proceeding. If in doubt, contact your lender for clarity on loan terms to make an informed decision.