A short-term loan can seem like a great way to deal with a financial issue, especially one that requires some quick attention. Getting that money in your hands quickly makes the whole situation easier.
However, not all short-term loans are alike, and a short-term loan isn’t always the best way to address a money problem. Recognizing both the advantages and drawbacks of these loans can help you make a more informed decision.
Let’s take a closer look at short-term loans in Canada, with a focus on their pros and cons.
What is a Short-Term Loan?
People usually apply for a short-term loan when they have a temporary financial need. Short-term loans aren’t precisely defined in terms of their length, although many have a 1-year duration. Instead, this loan category is more like a general concept. While the specifics can vary, these loans require you to pay back the amount borrowed in a much shorter period of time than a conventional loan. The exact schedule varies based on the provider and type of loan. It can range from a handful of days or weeks, common for payday loans, to several months or a few years.
A variety of lenders offer different types of short-term loans. Financial institutions, like banks and credit unions, offer them. So do payday lenders. The terms and conditions, including things that directly affect the cost of your loan, can vary greatly between individual lenders and from one type to the next.
Short-Term Loans: Benefits and Drawbacks
With that practical definition in mind, let’s review some of the major pros and cons of these loans.
Advantages of Short-Term Loans
On the positive side, short-term loans are:
Easy to Apply For
While some lenders require a detailed application more in line with traditional loans, many others offer simple applications. It can be as easy as sharing a relatively small amount of basic personal information and financial details.
Easy to Access
Many lenders make it easy to apply for their short-term loans. They build online loan application processes that reduce friction for their customers and encourage them to complete the application.
Available to People with Low Credit Scores
Once you start looking at this loan category, you’ll likely come across offerings like short-term loans for bad credit. Innovation offers both a Fresh Start Mortgage and Fresh Start Loan for example.
Disadvantages of Short-Term Loans
Drawbacks of these loans include:
High Costs
Some short-term loans have high interest rates, fees, and penalties for failure to repay. That’s especially common when loans don’t require a credit check. With less context about a borrower, there’s more risk related to repayment. Lenders reduce the risk they face by charging more.
The Financial Consumer Agency of Canada points out that payday lenders have especially expensive loan products.
Aggressive Repayment Timelines
If a short-term loan is intended to be paid back in a few weeks or months, there isn’t much room to spread that cost out across several payments. That can leave borrowers in a vulnerable financial position.
Limits on Total Amount Borrowed
Short-term loans are often focused on smaller dollar amounts, making them a bad fit for larger financial needs. And the high interest rates of some short-term loans mean even if you can borrow more, it won’t be a sound financial decision.
Finding a Short-Term Loan You Can Count On
Working with a financial institution, like a credit union, instead of a payday lender or similar provider is generally the best bet for finding a short-term loan with reasonable terms and conditions.
Just like Innovation, these organizations tend to offer helpful loan calculators and comparison tools and focus on more reasonable terms and conditions.
Want to take advantage of our many personal loan options? Compare our personal loan options to find the one that works best for you.