Using Short Term Loans for Business and Investments

Alex Hamilton  |

If you've seen short-term loans pop-up on television or online, you may have wondered how they work. There are short-term borrowing options that see a borrower through tight financing. About 69 percent of people use immediate loans for day-to-day living expenses.

These loans are due within days or weeks. If you cannot pay on the appointed date, the loan renews and interest rates may increase significantly.

How Do Short Term Loans Work?

This type of loan has a high interest rate due to the immediate availability of cash and the term of the loan. If the loan isn't repaid, the payback can escalate, so it's better to pay it off as quickly as possible. Although payday loan lending is regulated, it can get out of control if you don't repay it quickly. Here's an example:

If you borrow $200 for two weeks at $30, the interest rate is 15 percent. Compounded over the course of a year, that equates to an APR of 400 percent due to the shortened loan term. So, the best practice is to pay back the loan as quickly as possible.

Why Use a Short Term Loan?

Despite the high rates, millions of Americans need them to survive each week. These loans pay for utilities, medical or dental bills, and other sudden expenses. It's also an option for borrowers or investors with no or low credit scores since credit isn't much of a consideration.

How Much Can You Borrow With a Short Term Loan?

A short term loan is for short cash infusions of $100 to $1,000, so it won't pay your college tuition. Limits may be set by your state government or the lender. Some states set caps as low as $300 while others cap the amount at $1,000. Meanwhile, some payday lenders let you borrow $5,000.

Who Issues These Loans?

These loans are regulated by the government. Banks are required to have a minimum loan amount and check credit scores, so they aren't eligible to issue them. Instead, these short-term loans are supplied by payday lenders, such as Paychex Flex, which are often standalone stores.

How Do You Pay Back a Short Term Loan?

You can set up a direct deposit. The loan company withdraws the payment automatically when it's due. Some lenders also accept a post-dated check. Use the system that best suits your needs and helps you avoid missing a payment.

DISCLOSURE: The author has no stake in the listed equities


The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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