Glossary > Finance > Credit And Lending > Payday Lending

Short-term Loan

A short-term loan is a small amount of money borrowed for a short period, usually at a high cost. These loans are typically used to cover unexpected expenses or gaps in cash flow.

Example #1

Taking out a $300 loan to pay for car repairs until your next paycheck arrives.

Example #2

Borrowing $500 to cover immediate medical expenses.

Misuse

Misuse of short-term loans can occur when borrowers become trapped in a cycle of debt due to the high fees and interest rates associated with these loans. For example, if someone repeatedly takes out short-term loans to cover basic living expenses, they may struggle to repay the loans on time, leading to additional fees and financial stress. It's crucial to protect consumers from falling into such debt traps.

Benefits

Short-term loans can be beneficial for individuals facing unexpected financial emergencies who may not have access to traditional forms of credit. For instance, if someone's car breaks down and they need immediate repairs to get to work, a short-term loan can provide the necessary funds quickly to address the issue.

Conclusion

While short-term loans can offer a quick solution to pressing financial needs, consumers should exercise caution due to the high costs associated with these loans. It's essential for individuals to borrow responsibly and explore all available options before opting for a short-term loan.

Last Modified: 4/29/2024