Short term loans are loans provided by banks or other private finance companies, for a short period of time (maximum 5 years) and are one-time loans. These are available for individuals or business firms if they are not able to get a long-term loan from a bank. Repayment schedules are shorter in this case, and the interest is payable on the principal amount paid in advance. These are flexible personal loans that don’t require any collateral and depend on the credit history of the individual applying for it. These loans solve the purpose of financing day-to-day operations, immediate financial needs, a monthly requirement of capital, payment of remuneration, expansion, and renovation, and to run the firm smoothly.
Features of Short-Term Loans:
- An individual – salaried and self-employed or a business firm, both can apply for a short-term loan.
- Loan Tenure is flexible and can be up to 1 year.
- Flexible amount of loans which can be availed as per requirement, eligibility, credibility, and needs
- Variation in interest rates as per the credit score of each individual, firm, or depending on the amount and tenure of the loan. Comparatively, interest rates could be a little higher than usual personal loans.
- An easy and simple process of documentation, application, approval, and disbursal.
- Many lenders do not require collateral security or a guarantor in case of short-term loans
- Loans can be customized as per the requirements of the applicant.
- These loans can be applied online with minimum and simple documentation process.
- EMI repayment plans are customized and flexible as per the ease of the payee.
- These loans are perfect for people who could not avail long term loans.
- These loans can offer up to a maximum of Rs. 1 crore.
Benefits of Short-Term Loans
Although these loans are not highly recommended because of their high-interest rates and low tenure, when the need is high, and there is no other capital financing option left for the applicant, short term loans are the best choice. Let us look at various advantages of these loans:
- Fast and easy cash: A quick access to cash can be availed only by a few clicks and successful uploading of relevant documents.
- Few Restrictions: It is a hassle-free process with not many qualms about the application and disbursal process.
- Less Paperwork: It could be an entirely paperless transaction and an extremely quick application process. The relevant documents required can be submitted online, and disbursal of the loan can be on your tips.
- No collateral security or guarantor required in most cases – The applicant can avail the loan and get funds easily and quickly without getting into the hassles of attaching collateral security or getting a guarantor.
- Poor credit history can also work – These loans are short term and can be availed by people who don’t have a very high credit score or rating. Thus, the credibility of the customer is not that big a requirement in this case.
- Short term commitment – This will only last for a year, where the loan will be quickly disbursed, and repayment needs to be done within 12 months. So, the long term commitment does not exist in this case.
- Flexibility in the tenure, loan amount, repayment, and pre-payment options and the EMIs to be made towards it.
Types of Short Term Loans:
Short Term Loans could be of different categories:
- Working capital loan – Short Term loans acquired for working capital can help the applicant solve day-to-day operational issues like payment of salaries, paying regular bills, inventory, stocking, cash requirement, renovating and repairing, or just filling up the capital to pay for other expenses.
- Loan against securities – Instead of liquidating assets, some applicants may avail these short term loans by pledging their securities and shares like the stock of the company, insurance, and bonds, debentures, mutual funds, etc.
- Overdraft– This is one of the most common ways to avail of a short-term loan, especially for business firms who need instant cash to pay their debts or to enhance their capital. The overdraft facility is provided by banks where they allow the individual to overdraw extra money from the bank, which is more than the available balance of the customer up to a certain limit for which interest is charged.
- Machinery and equipment loan – This kind of loan is taken by small industries or manufacturing businesses to repair broken machinery, purchase new machinery, technologically update the working of the firm using computers/laptops or printers, or replace or upgrade to a potential new machine.
- Flexi business loans – Another popular category of loan where the interest is charged on the loan amount is used on a flexible basis where the same amount of loan can be used by the applicant multiple times and available for him as per his recurring requirements.
- Credit card loans – Many credit card companies provide short term loans on the available limit or sometimes even a higher limit on duration of about 2 to 6 months with a comparatively higher rate of interest.
Steps to Avail a Short Term Loan
Step 1 – The first thing to do is to check the credit score. The higher the credit score, the better the scope and amount of loan.
Step 2 – Do thorough research on various lenders and check the tenure, amount, rate of interests, eligibility criteria, and other details before settling for an apt lender.
Step 3 – The applicant must start gathering relevant documents without which the loan will not be processed. Common documents could be personal, business-related, or legal documents.
Step 4 – Every lender has a different format for an application form, so the applicant must fill in the details appropriately and provide every piece of information that is asked for.
Step 5– Approval may come instantly or in a couple of days. As soon as the loan gets approved after the investigation and verification of the documents, the disbursal process will start.
Step 6 – Finally, the disbursal of the loan will take place directly in the account details specified by the applicant.
Eligibility Criteria to apply for a short term loan:
- The applicant must be a Resident of the country and should be above 18 years of age.
- The applicant can be a salaried or self-employed individual. Even business firms can apply for short term loans.
- The monthly income of the individual should be at least Rs. 15000 and he must have a savings account in a bank
- For salaried individuals – work experience of two years is a must, and his last 6 months salary slips would also be required.
- For business firms, the organization’s ownership must be for over a year and should have a business registration certificate with an annual turnover of Rs. 2400000
- Proper income tax returns must be filed in the previous year, and an audit must be done by a CA.
Documents required for a short term loan application
- Income tax returns for the previous 1-2 years.
- PAN Card and Aadhar Card
- Income proof in the form of salary slips
- Proof of Residence in the form of utility bills, banks statements or Aadhar card
- Proof of identity in the form of Passport, Voters Card, Driving License, Aadhar card
- Proof of age in the form of a birth certificate, PAN card, Passport
- Proof of employment for salaried individuals like Form 16, Offer and relieving letter
- Passport-sized photographs
- Audit reports for previous 1-2 years
- A list of Debtors and creditors with financial details
- Bank statements of the Previous 12 months
- Certificate of incorporation of the firm
- Invoices of technological updates, purchase or repair of equipment and machinery invoices
Do’s and Don’ts of applying for a short term loan:
- Plan your finances well to prepare for installments according to the amount of the borrowed loan.
- Repayment towards the loan should always be on time; else, it may badly affect the credit rating and hamper the goodwill and credibility of the individual or the firm.
- Use the loan amount diligently instead of wasting it on personal and useless expenses. It should only be used for the enhancement and development of the business unit or urgent financial emergencies.
- Never indulge in taking cyclic loans and reusing the amount that has already been paid. Also, taking short-term loans from multiple banks is a bad idea as the interest and the EMI to be paid will only increase and soon be out of the monthly budget of an individual.
- Due to the easy availability of these loans, one may tend to overspend or misuse the funds. This should be strongly avoided as it may lead to financial constraints and pending loan payments, which will negatively impact individuals’ credit ratings.
- One should not be greedy and take only what is required. Even if banks offer a high amount, one must not take the bait and only take what is required. Any excessive amount taken will be spent in a whiff and will take ages to repay.
Drawbacks of a Short Term Loan:
- High-interest rates – Compared to other loans, short-term loans come at a very high price in the form of a high-interest rate.
- Costly fees – Fees like non-payment of EMI or late payment can impact the fees and fine and even the credit rating to a large extent.
- Not a solution for the long term – This should only be used for a short span of time only for emergencies and urgent financial constraints and should be repaid as soon as possible.
Comparison of the Best Short Term loans available in India
|Lender||Rate of Interest||Tenure of Loan||Minimum and Maximum Loan Amount|
|CASHe||Monthly -2.75% – 3.00%
|62 days – 12 months
|Rs.9,000 – Minimum Rs.3 lakh – Maximum|
|Early Salary||Monthly 2.00% – 2.50%
|90 days – 365 days
|Minimum – according to eligibility
Maximum – Rs.2 lakh
|Bank Of Baroda||As per the terms and conditions
|Rs.10 lakh – Minimum Rs.250 lakh – Maximum|
|Funds Tiger||The average rate of 20%
|3 months – 12 months
|Rs.50,000 – Minimum Rs.20 lakh – Maximum|
|Money In Minutes||Daily 0.1% – 0.7%||30 days – 12 months
|Rs.1,500 – Minimum Rs.1 lakh – Maximum|
|Pay Sense||Based on the credit score
|As per the terms and conditions
|Rs.5,000 – Minimum Rs.5 lakh – Maximum|