What can you do with a short-term loan?

Let's think about loans as a financial tool. Like any tool, it's important to pick the right one for the job. If you only need a small bit of cash for a temporary purpose, like buying the right equipment for a new job, a short-term loan that you repay over a few months could help.

Like anything else, however, they have pros and cons. Some short-term loans may be better for your financial health than others.

Ready to learn more? Let's go.

What is a short-term loan and how does it work?

A short-term loan is a personal loan you repay quickly, usually within a year. There is no single blanket definition of a short-term loan, so it could be shorter or longer with some lenders.

Short-term loans are also usually for smaller amounts than multi-year loans. That's because they're designed for you to repay them fairly quickly. Ideally, it should be easy for you to fit your monthly payments into your budget.

A quick word about payday loans and auto title loans. They're technically considered a type of short-term loan, since you typically repay them within a few weeks or months. But it's best to avoid them if you can. These types of loans are broadly considered to be predatory, and they could easily turn your finances upside down. They charge very high fees—higher even than bad-credit loans—and their lenders often use particularly unfriendly business practices.

Common (and smart) uses for short-term loans

One of the biggest advantages of short-term loans is how you can use them for just about anything. They're generally very flexible. That said, it's smart to use your loan for needs, rather than wants. This helps you avoid overextending your budget.

We all deserve nice things now and then. But one thing that's extra-nice? Enough wiggle room in your budget so that when you really need to borrow money, you can afford taking on an extra payment without having to worry about your other bills, too.

Here are a few smart short-term loan examples:

• Fill up your home heating fuel tank for the winter.

• Fix your car when it breaks down, so you can get to your job.

• Pay the medical bills if your child is hurt while playing soccer.

• Repair leaking plumbing in your walls, before it grows unhealthy mold.

• Evacuate temporarily during a natural disaster like a hurricane or wildfire.

One thing to watch is that a short-term loan isn't a substitute for an emergency fund. If you have room in your budget, put a little extra money into a rainy day fund each payday. That cash cushion could help you avoid borrowing when the unexpected happens going forward.

Pros and cons of short-term loans

Like any borrowing choice, short-term loans have some potential upsides and a few trade-offs. Here's how they stack up.

Pros

• Flexibility to cover a range of expenses.

• Often easier to get than larger, longer-term loans.

• May have a lower interest rate than a credit card.

• Could help you build a positive payment history when paid on-time each month.

Cons

• An extra bill added to your monthly budget.

• Missed payments could hurt your credit.

• Could have a higher interest rate than other borrowing options.

• Short-term loans tend to have higher monthly payments than longer-term loans.

Achieve is not a Credit Repair Organization and does not provide, or offer, services or advice to repair, modify, or improve your credit.

When a short-term loan might not be a good idea

You're on the right track if you're thinking about other options. Short-term loans can solve many problems, but they're not always the best choice for every situation.

First, it's good to think about whether you can afford the loan payments. You can use a loan calculator to help you figure out what those payments might be. Then, compare it with your budget to make sure your payment would fit.

Next, it's also good to think about why you're borrowing the money. Money experts recommend avoiding short-term loans for things that you don't really need or that aren't really temporary problems, like:

• Vacations

• Extra furniture

• Shopping sprees

• Ongoing monthly budget shortfalls

Payday loans deserve extra caution here. A typical two-week payday loan can carry an APR of almost 400%. A rate that high dwarfs what you'd pay on a typical personal loan or even a subprime credit card.

Before you get caught in a payday loan trap, consider if a personal loan could be a better fit. You can even check your estimated rate through Achieve Personal Loans with no impact to your credit score to see if it could be an option.

Alternatives to short-term loans

A key part of any good decision is knowing your other options. That way, you can be confident you're making the right call. There are lots of alternatives to short-term loans, depending on your needs and your situation.

Here are a few other options to consider:

Credit cards

Most credit cards offer a grace period that lets you avoid interest when you pay your statement balance in full before your due date. This makes them ideal for short-term borrowing, since you could potentially get an interest-free loan if you can repay your balance in time. But even if you need a couple of months, carrying your balance on a credit card could be more affordable than a high-cost payday loan.

Credit cards may also be a source of fast cash through a credit card cash advance. A cash advance isn't included in the grace period, however, so it will start accruing interest right away—often at a higher rate than normal purchases. This could still be a better option than a payday loan, though.

Payment plans

Some businesses, especially many medical offices, offer payment plans and other financial assistance. This could be a lower-cost way to cover your bill than a personal or payday loan. It doesn't hurt to ask.

Longer personal loans

Short-term loans can be unaffordable when the monthly payment is too high for your budget. A personal loan with a longer loan term could fit into your budget better or offer a larger loan amount than you might get with a short-term loan.

Home equity loan

If you own a home worth more than your mortgage balance, a home equity loan could be a good option for larger borrowing needs. Just be aware that your home secures the loan, so it's especially important to pay on time to avoid potentially losing your home.

Loan forbearance

Larger loans, like student loans and mortgages, may offer temporary loan forbearance if you run into short-term financial snags. That can free up room in your budget for other necessities, like groceries.

Tap into retirement savings

Some retirement accounts, like 401(k)s or Roth accounts, may allow you to borrow or withdraw funds without paying any penalties. The downside is you lose out on interest growth for the money you take out. Borrowing from your retirement account could also trigger tax penalties in some cases, and changing jobs could move up your repayment date. Plus, not all Roth withdrawals are penalty-free. Talk to a tax professional before you pursue this option.

Loans from friends and family

Loans from friends and family aren't a bad option if they're available to you. But your relationships are more valuable than money, so it's extra-important to make sure you're able to repay the cash you borrow.

How to decide if a short-term loan is right for you

Ready to check whether a short-term loan is really your best option? Here's a quick, handy checklist you can use:

• How urgent is it? How fast you get funds can vary a lot between financing options. You might already have a credit card in your wallet, for example. You can often get a short-term personal loan without a long wait, while options like home equity loans could take weeks.

• How much does the loan cost? It's important to know what the monthly payment will be before you accept any loan, for sure. You also need to know how much it costs over time, and that depends on the loan term length, your interest rate, and loan fees.

• Can you afford it? Your monthly payment should fit within your budget, and it's best if you still have plenty of room left over in case other surprise expenses crop up. Also ask yourself whether you're comfortable paying all the interest and fees over the life of the loan.

• What are your other options? It's hard to take time to check all of your other options if you need an emergency loan. Still, it only takes a few minutes to research the most common options that might be available for you.

• What do you need the money for? Some emergency loan uses, like medical bills, often have more affordable repayment options. And it's best to avoid short-term loans for things that aren't necessary, like impulse buys.

Before you commit to an expensive option, get prequalified with a few personal loan lenders that use a soft inquiry to give you a quote. Soft inquiries don't hurt your credit scores. Prequalification could give you an idea of what kind of rates and terms you might qualify for if you apply.

Find out if you're eligible through Achieve Personal Loans today.