Loans are taken to fulfil long-term dreams and to increase one’s net worth. By helping us buy a house or fund higher education, loans help us achieve higher financial goals. Taking a long-term loan may need careful financial planning. However, some requirements are abrupt and short-term, such as money crunch due to a sudden spurt in business or a health emergency. And these requirements are best met with short-term loans.
A variety of short-term loan products are now available to borrowers. They’re different from regular personal loans because their tenures can be less than a year. Like personal loans, they can be availed quickly and come handy when you are momentarily low on liquidity and can repay a loan sometime in the immediate future. These short-term loans are usually unsecured in nature but some lenders may ask the borrower to secure it against a collateral security. In this article we will take a look at the various aspects of short-term loans in detail.
Instances where you can use short term loans
Short term loans can be of use for both personal and business purposes.
Payday loan, consumer durable loan, holiday loan etc., are some loan products that can be used for personal purposes to meet money needs such as when there’s a delay in getting monthly salary or a brief liquidity crunch due to overspending.
For business purpose, short term loans are given to you without collaterals based on your creditworthiness.
Short-term loans are flexible with flexible repayment tenure.
Let’s look at the different short-term loans available in the market and the eligibility criteria to avail them:
These are loans that people opt for if they fall short of money towards the end of the month while they are still awaiting their salary. Payday loans are gaining popularity in India due to their flexibility and the convenience of borrowing a small amount. The borrower commits to pay a part of his salary once salary is credited. You can avail payday loan in a few hours through online application. Their interest rates may be higher than the rates on personal loans or comparable to credit card rates. They are offered by private lenders for now. For example, one lending start-up advertises a rate of 2.5 per cent per month, and 30 per cent per annum for overdue interest.
Loans from the employer
Some employers allow you to avail advance salary for a few months against a very low rate of interest or no interest at all. This borrowed amount along with interest (if any) is then adjusted through deductions every month from salary. However, make sure you are aware of the tax implications on this loan, as the money lent to you by your employer is treated as a perquisite and taxed accordingly. Exemption from tax is available where the borrowed amount does not exceed Rs 20,000 or is used for medical treatment.
Loan for SMEs
Banks, NBFCs and FIs offer short-term loans to business enterprises in need for temporary funding. The loans are offered based on the credit worthiness of an owner or a company. In order to assess the credit worthiness of a company, the lender typically looks at the last three years ITRs, balance sheet and the profit and loss account of the borrowing company before sanctioning a short-term loan. Short-term loans are usually unsecure in nature, but the lender may ask you for a collateral security if the loan amount is big.
Personal loan against credit card
If you have a good repayment history to show on your credit card, banks may offer personal loan against it without asking for any collaterals or post-dated cheque. This could come handy at times of money crunch to someone who uses a credit card with discipline and ensures timely repayment. The loan amount is pre-approved and it is credited directly into the savings account of the applicant.
Financial institutions look at your credit score, ITRs of last two years, identity and address proof, etc. before lending out to you. A low credit score could lead to an upfront charge of high interest or even rejection for that matter.
Things to keep in mind
Short-term loans are easily available but the convenience associated should not tempt you to borrow frequently for every little need. You must use this type of loan as a bridging tool to achieve your financial objectives in case of a momentary money crisis. Before you borrow, have a repayment plan in place. Unsecured loans can have high interest charges, so opt for a short loan tenure and repay in time.
The writer is CEO of BankBazaar