What are the Different Types of Short Term Loans?

Are you in dire need of funds due to a medical emergency? Urgent working capital funding is required whereas your receivables are due after six months?

If your answer is yes to any of these questions, read on to find out more.

Understanding Short Term Loans and Their Features

Short term loans are borrowings taken to meet short term liquidity requirements which can be for personal or business needs. The repayment period for these loans is usually up to a maximum of 5 years, depending on the context of the loan.

The main features of short-term loans are:

  • They offer flexible repayment schedule 
  • The tenure for these loans being short term, lenders usually process them faster, in some cases, even without any collateral. 
  • Interest rates are higher due to the short tenure of the loans.
  • Financial lenders offer fast-tracked processing and approving of these loans as minimal paperwork are involved as compared to other loans
  • Helps improve your credit score provided repayments are made on time. This further builds in improving creditworthiness while applying for bigger tenure loans.

Types of Short Term Loans Offered In The Market:

  • Personal Loans :
    Personal loans are the most popular and favored type of short-term loans that the market offers. Personal loans are collateral-free short term loans, thus making it risky for lenders. This risk is covered by high-interest rates charged on this type of short term loans.  

    Financial lenders offer different types of personal loans based on the needs that can vary like for marriage or education, renovating your house, medical emergency, or even traveling.
  • Overdraft Facility :
    This is a facility offered by banks wherein businesses are allowed withdrawals over and above their account balance. All one needs is a current account and sanctioned overdraft facility and you can avail it as per your business needs. 

    So you can pay your vendors while still waiting for payment from your customers. It helps in keeping the working capital requirement of businesses afloat.
  • Bridge Loans:
    Bridge loans are taken to help you out financially while you are still waiting for another loan. Alternatively, also known as ‘Interim financing’, Gap financing’, these are usually preferred by individuals used in property transactions, where financing is required for a down payment of new property but the sale of an existing property is still under process. It can be taken by companies while waiting for future cash inflows.

    Bridge loans, in simple words, helps in bridging the gap between short-term cash requirements and long term loans. These loans are provided at high-interest rates and are secured by asset collateral like the property itself.
  • Demand Loans:
    Demand loans are meant to meet short term financial needs and can be availed by individuals or businesses. These are secured loans that need security/collateral against which the loans are sanctioned by the banks & other financial institutions. For individuals, lenders usually accept insurance policies, fixed deposits, or NSC’s as security and for businesses, they may use their invoices, lease rentals, or accounts receivables as collateral to lend short term finance.

    The tenure of the loan is fixed by the lenders in consultation with the buyers and repayment can be made anytime within the tenure without zero prepayment charges. With no fixed EMI payments, repayment terms of Demand Loans are flexible.
Must Read: Ways to Choose the Right Personal Loan Tenure

One should compare the pros and cons of these loans and if there is reasonable certainty regarding proper repayment as per the terms agreed, one should opt for short term loans for improving your cash flows in the short run.

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