Short-term lenders meet the needs of people who need to borrow a smaller amount of funds quickly, but lack the credit to obtain a loan from a traditional lender. These loans tend to carry high interest rates and can become very costly if not paid back promptly. There are several types of popular short-term loans available, but the legal guidelines for these businesses vary greatly by region. The most commonly found short-term lenders include credit card companies, pawnbrokers, and payday loan companies.
Each type of short-term lender meets a consumer demand that large financial institutions do not fill. Traditionally, when a person needs to borrow money for a large purchase, they secure financing through their bank or another large-volume commercial lender. Bank loans accrue interest and are paid back over a set period of time. Traditional lenders tend only to work with people who have excellent credit and need larger sums of money, whereas short-term lenders typically accommodate customers with any sort of credit rating.
One of the least risky ways to get money quickly is by taking out a cash advance from a credit card company. Many credit card companies offer their customers the option to borrow a small amount of money in the form of cash, which is charged to their credit card balance. There is typically a fee involved for this service, in addition to the credit line interest that would be applied to a credit card transaction; the interest rate for cash advances, however, can often be much higher than the rate for regular credit card purchases.
For those who do not have a line of credit, pawnbrokers also provide an alternative for borrowing small amounts of money in a pinch. Pawnbrokers commonly hold an item of value, such as jewelry, guns, or vehicle titles, as collateral for a short-term loan. Typically, failure to pay back the loan and any interest accrued by the contracted date results in loss of the item of value. Also, if a vehicle’s title is pawned, in many regions the car can be repossessed for failure to repay the loan.
Payday advance lenders have become a popular option for those with documented employment. Typically, the lender agrees to loan a small amount of money until the customer’s next scheduled payday. The loan amount and any interest accrued is deducted from the customer’s bank account on the day it is due. If the funds are not available to the lender, high fees are often assessed.
While short-term lenders help people who find themselves in a financial bind, many experts caution against short-term borrowing unless the ability to repay the loans on time is guaranteed. The high fees and interest involved in a short-term loan makes them a costly option for solving financial burdens. In many areas of the United States, short-term lenders are restricted from operating due to the local laws.