Short term loans are loans which are essentially provided for a short tenure of less than one year. These are usually one time loans and can come in useful in case you are not able to obtain credit from a bank for a longer tenure loan. In case of these loans, the interest is usually payable on the principal advance amount and repayment tenures are shorter as compared to other types of loans. These loans are also made available to customers and businesses and may be provided by private finance companies or banks. These loans are generally unsecured however in case they are being offered by banks, they may require that you secure these loans with some collateral. Short term loans are also referred to as short term finance or short term instalments loans because they can be paid back in monthly instalments.
Features of the short term finance
Short term loans come with features that may differ from one lender to another. They may also differ when it comes to comparing short term loans in the US vs those in the UK. Some of the features of the short term loans are:
- You can apply for short term or payday loans as an individual or as a business.
- Though some companies may choose to approve your application based on your credit history, there are those that will give loans to even those with bad credit histories.
- It is possible to apply for these loans online due to the with minimal paperwork involved.
- They can be approved and issued in a day’s time depending on the company’s policy.
- They can be secured or unsecured depending on the lender offering the loans.
- Some banks offer short term loans, the repayment period for which can range from 60 days to 120 days. That’s a repayment period of approximately 4 months.
Interest rates for Short Term Loans
Since short term loans can be payday loans or Personal Loans that are payable within 12 months or less, the interest rates may differ. Another factor that affects these interest rates is the institution that offers these loans. Interest rates for short-term loans can be extremely high especially because borrowers take the loan only for a small duration, and hence, they will not feel that it is not too big an amount to repay. The rate of interest for short-term loans is approximately 18% p.a.
- Payday loans: short term payday loans are offered by private lenders or banks and come with very high interest rates that can easily top 2000% p.a. There are lenders who offer lower interest rates however, these too could be as high as 400% p.a.
- Short-term loans from banks: These are loans that are offered by banks and come with interest rates that are not as high as those of payday loans offered by private institutions. A rough estimate of these interest rates would show a range of 120% to 270% p.a.
The interest rates charged for short-term loans depend on the type of loan you go in for. For example, personal loans come with interest rates that can range from 10.65% to 21% p.a. Some banks offer SME short-term loans at interest rates that range from 12.5% p.a. to 14% p.a. HDFC offers Bridging Loans at 9.50% to 11.50% p.a.
The advantage of these short-term loans offered in India is that they are tailored to suit everyone’s specific needs. If you need to finance a vacation you can go in for a personal loan and if you want to buy a new house after selling your old one you can go in for a bridging loan. Even if you need to finance a company, you can go in for a bridging loan or an SME loan to ensure continued operations.
Short Term Loans with Bad Credit History
Many times, the borrower may be in a position where most lenders have refused to issue loans to them as a result of bad credit history. There are financial institutions that will offer loans even if the credit history is bad. The interest rates may be higher but the loan will still be approved. There may even be situations where the bank will approve a payday loan for an individual with a bad credit history, and adjust the interest rate according to how bad the history really is, among other factors.
Short Term Loans with No Credit Checks
At times institutions may offer short term loans to individuals without carrying out any checks of the credit history. This is a facility that is provided at the discretion of the institution. These short term loans can also be extended to companies that need money to meet their financial obligations and don’t have a line of credit extended to them by their banks. There may even be times when these short term cash loans can also be availed by students who are finding it difficult to meet their payments for rent or tuition fee.
Short Term Loans from Banks vs Private Lenders
Going in for a short-term cash advance is a decision that it should not be taken lightly. If you do decide to take a short-term loan, you must then decide if you intend on taking it from a bank or a private lender. So let’s take a look at banks and private lenders match up to one another for these loans.
- Interest rates: Banks tend to have cheaper interest rates compared to the interest rates charged by private companies. This difference can be quite considerable at times when banks charge an interest rate of 36% and private companies charge anywhere up to 2,000% per annum for short-term cash loans.
- Easy approval: There are times when someone applying for a short-term instalment loan may not have a strong credit history. In such a case, they are most likely to be rejected for a loan by most banks however, private finance companies will still provide loans to them.
- Fast loans: The paperwork required for these loans is typically minimal however private companies offer the convenience of approving the loan and issuing the funds within a few houses. This means that you get access to money faster than you would if you were to apply to a bank.
- Regulations: Banks tend to have stiffer regulations about who can apply for these loans which tends to eliminate a number of would be borrowers. Private companies, on the other hand, do not have stringent regulations making them easier to apply for.
In general, short term loans or payday loans should remain an absolute last resort because they tend to be very expensive. Even if you must take one, make sure you take only the amount that you need and no more.
While in the US and in the UK you have the option of short term finance, in India this option is not available. What is available in India is slightly different.
Short Term Finance in India
In India, loans that come with interest rates in excess of 100% are non-existent. What is available is a variety of short term loans that are meant to help you with your personal finance as well as finance for your companies. These short term loans come in various forms like personal loans, short term loans for SME and even short term Bridging Loans for individuals buying a house.
These loans too tend to be secured and unsecured depending on the type of loan you take, which also decides the interest rates that you will be required to pay. The loans are provided by banks and non-banking financial companies
Types of Short Term Loans in India
There are various loans that you can take and payback in a year’s time in India. They range from personal loans to loans for business.
- Personal loans: These are loans that can be taken by salaried and self-employed individuals and can be to the tune of Rs.30 lakh, depending on the bank or company you approach for the loan. These loans can be paid back in a period that ranges from 6 months to 5 years, and typically comes with interest rates that are higher than other loans. The advantage of these loans is that there are no restrictions on what you use the money for and are generally issued quickly, in a period of 48 to 72 hours, and require minimal documentation.
- SME short term loans: These are loans that are extended by banks to companies that need to take loans to meet their immediate requirement for funds. There are certain eligibility criteria that are defined by the banks which companies must meet in order to avail this loan. For example if you were to go in for this loan from Bank of Baroda the eligibility criteria would be as follows.
- The company would be required to have a minimum annual turnover of at least Rs.150 crore.
- The composite limit for the BOB SME short-term loan is Rs.5 crore or 4.5 times of tangible net worth of the borrower according to the last balance sheet, whichever is lower. The margin for this loan product is 25%.
If you choose an SME short-term loan from DHFL, you will get financial assistance for purchasing machinery, property, machinery, plant, medical equipment, etc.
- Bridge loans: These are loans that can be taken to tide you over till you can get another loan. In India, these loans are associated with transactions related to the buying and selling of property. How it works is that if you want to buy a new house, have found the perfect one but don’t have the funds to purchase it because the old house hasn’t been sold yet, you can go in for a bridging loan that will let you buy the new house while you wait for the old one to be sold. These loans can also be taken by companies against expected returns or even while a company waits for their funding to come through.
- Demand loans: These are loans that can be provided by banks or NBFCs to meet any urgent financial demands that you may have. They can be secured loans wherein you provide savings instruments like insurance policies and NSCs to take the loan. The amount that you can borrow will be determined by the maturity value of your savings and will be a certain percentage of said maturity value. The loan could range from 70% to 90% of the surrender or maturity value of the savings instrument.
Eligibility criteria for Short Term Loans
The eligibility criteria for these loans changes for each loan. It is different when it comes to bridge loans and personal loans. With SME Loans too, the eligibility criteria will differ since they can be taken by companies rather than individuals. A general criteria for these loans could be:
- For individuals
- The applicants need to be salaried or self-employed.
- They will need to have a monthly income that is above a certain amount. A rough estimate could be Rs. 8,000 per month but this figure is subject to the bank’s policies.
- They will be also need to be between the ages of 21 years and 60 years, again subject to the policies set forth by the bank.
- The approval of the loan may also depend on the ability of the individual to provide all supporting documents.
- For companies
- They may need a past relationship with the bank.
- They will need to be in a position where the business is making money or has been do so in the past 2 years or so.
- They may also have to be in operation for a specified period of time and have a specified annual revenue to qualify for the loans.
Documents Required for Short-Term Loans
- PAN card
- Proof of income: Salary slips for the most recent 3 months
- Proof of residence: Rental agreement, Passport, Landline bill, Post-paid mobile bill, Bank statement
- Proof of identity: Driver’s license, Aadhaar, Voter ID, Passport
- Proof of age: Driver’s license, PAN card, Passport
- Bank statements for the last 6 months
- Proof of employment: Offer letter, Form 16, Relieving letter
Short Term Loans FAQs
Can short-term loans be taken with a low credit rating?
This will depend on your lender. However, most lenders do offer short-term loans even if an applicant has a low credit rating.
Will I need to make arrangements for a guarantor to get my short-term loan approved?
This will differ from lender to lender. However, most likely, you will not need a guarantor for your loan application to be approved.
Do I need to furnish a collateral or a security for my short-term loan application?
No, short-term loans are usually unsecured loans. This will depend on your lender.
How long can I take to repay a short-term loan?
A short-term loan needs to be typically repaid within 1 year. However, this will depend on your lender and the tenure that you choose.
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