Short Term Loan: Definition and Examples

A short-term loan is a type of borrowing that is typically repaid within a year. These loans are often used to address immediate financial needs and are designed to be paid off quickly, usually within three to twelve months. Short-term loans can come in various forms, including payday loans, merchant cash advances, and lines of credit. They are often easier to obtain than long-term loans, making them an attractive option for individuals or businesses that need quick access to funds.

Example: Imagine a small business owner who needs to purchase inventory for a seasonal rush. They might take out a short-term loan to cover the cost, with the intention of repaying the loan once the sales from the season come in. The loan provides the necessary capital to meet the immediate demand, and the business can repay it within a few months after the revenue is generated.

Short-term loans typically have higher interest rates compared to long-term loans because of the quicker repayment period. Lenders charge more in interest to compensate for the higher risk and shorter timeframe in which they will receive their money back.

There are various types of short-term loans, each serving different needs:

• Payday Loans: These are small, high-interest loans that are meant to be repaid on the borrower’s next payday. They are easy to obtain but come with very high fees and interest rates.

• Merchant Cash Advances: This type of loan is based on future credit card sales. The lender provides a lump sum that the business repays by giving the lender a percentage of daily credit card transactions.

• Lines of Credit: A line of credit provides a set amount of money that a borrower can draw from as needed. The borrower only pays interest on the amount used, and they can continue to borrow as they repay, up to the credit limit.

Short-term loans are useful in situations where quick access to cash is essential, but borrowers should be aware of the potential for high costs and ensure that they can repay the loan within the agreed timeframe.