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Overview
Sometimes, you need money fast. Whether you need to pay an unexpectedly large bill or just want to make a last-minute purchase, you may need the money sooner than a bank can approve your credit and collateral and get the money to you. In cases like this, you may opt for a short-term unsecured loan. However, these loans can ultimately be problematic, so make sure that you understand what you are agreeing to before you sign any papers or receive your money.
Features
A short-term unsecured loan is a loan that will be paid back between 3 to 72 months. The length of time will depend largely on the amount of money you want to borrow, your credit rating and your provable income. An unsecured loan is also known as a personal loan, which means that the borrower is not holding anything as collateral other than your "good name." If you default on the loan, they can sue you for the money, but they will not get to keep the title to your car or the deed to your home, for example. As a result of the risky nature of these loans, short-term unsecured loans have high interest rates and are usually for less than $15,000.
Function
People usually use short-term unsecured loans because they can get this type of loan in as little as half an hour in some cases. If you do not have time to wait for a traditional lender to evaluate your case, then a short-term unsecured loan may be your only option. Also, if you do not have the credit or the collateral to qualify for a traditional loan, then you may have no choice but to take out a short-term, unsecured loan and pay the higher interest rate.
People may turn to short-term unsecured loans to help with unexpected medical bills.
Types
Short-term unsecured loans come in many terms and lengths. If you want a short-term unsecured loan that is as similar to a traditional loan as possible in rates and terms, then you will need to provide a great deal of information about yourself in order to prove to the lender that you have the ability to repay. If you do not have information that meets these requirements, then your interest rate can rise exponentially and the term of your loan will become shorter and shorter while the amount of money lent decreases.
Misconceptions
Most people believe that short-term loans are made only by loan sharks and can never be repaid. However, they also have roles in many legitimate business opportunities. For example, many real estate investors use short-term unsecured loans when they are making last-minute deals with owners of distressed properties who cannot wait for banks to give the investors secured loans. Then, once the investors resells the properties, they pay the loans back. They do not mind the high interest rates because they only need the loans for a few months at a time.
Prevention/Solution
Obviously, we would all prefer not to have to borrow money. The best way to avoid taking out a short-term unsecured loan is to build an emergency fund, so you have the means to pay in cash if a last-minute expense occurs. Also, if you do take out a short-term unsecured loan, make sure you pay it off quickly to minimize your interest costs.
Warning
While short-term unsecured loans do solve problems for some people and have their place in business, they can be catastrophic if they are allowed to lapse or collect interest unchecked. Be very careful to read all of the terms and conditions of the loan and make sure that you can meet them before you sign anything. Because people usually take out these types of loans when they are in emotional distress, it can be difficult to slow down and read the fine print. However, it is vital that you do so or you could end up repaying the company more than what you actually borrowed.
