There are very different needs in life, for which the budget is not always enough. Therefore, a popular form of support for achieving goals or solving problems is assuming obligations in the form of various financial products, eg short-term loans. What does their structure look like and are they safe? Read.
What is a loan?
Credit is a kind of financial support. To be effective, it must be concluded in the form of an agreement between two parties – the borrower and a bank or non-banking institution. The loan has its specific structure and is characterized by certain elements:
- Maneuverability – We have to refund funds received from the bank
- Purposefulness – the bank provides us with a certain amount of money for a pre-determined purpose
- Payment – when deciding to commit in the form of a loan, we must reckon with the fact of the costs we incur for the fact that the bank provides us with funds for specific purposes.
By deciding to enter into a commitment, for example a short-term loan, if we know all the conditions imposed on this financial product, it will be easier for us to plan the repayment period and the amount of the monthly commitment.
Types of loans
The financial market is today saturated with many financial products that customers tailor to their needs and opportunities. There are many products and it is worth pointing out a few basic types that govern this market:
Natural persons benefit from several basic types of loans:
- consolidation loan
- consumer loan
- credit card
- investment loan
Another division applies when we indicate the loan repayment period:
- short-term loan
- long-term loan
- medium-term loan
And due to the subject of the loan agreement, we will divide the loans into:
- consumer – with distinction for cash, student, car and many others.
What is a short-term loan?
A short-term loan, as the name implies, is a borrower’s commitment for a fairly short time. Namely, it is granted for up to 1 year. Its structure is usually simple, because it is granted to the borrower in small amounts. Thanks to this, banks or non-banking institutions that give them to us are able to assess their risk to a greater extent. Most often we need such loans for consumer purposes. They are designed to simplify the application procedure as much as possible. They are to encourage regular customers to reach for these solutions many times for purposes that are not sufficient for the household budget. And for new customers, they are usually offered with promotional cost rates, which are usually higher than the promotion.
Pros and cons of a short-term loan
Like all liabilities, short-term credit has its advantages and disadvantages. Among the first, it is undoubtedly worth pointing out the fact that it can be obtained quite simply by submitting a few basic documents that the bank requires or by completing a short form on one of the credit services available on the internet. Also, as you can see, its availability is widespread. The more that we can get it for any consumption purpose such as gifts for the holidays or new equipment or New Year’s Eve or holiday trip. The downside you can see here is the limited amount you can apply for. As we mentioned earlier, the bank willingly grants these loans because they report to relatively small amounts. In addition, one should take into account the relatively high costs of granting the loan, including commissions for granting, servicing as well as higher interest rates. Generally speaking, we will be dealing here with a higher total cost of credit.
What to look for when taking a loan?
In the case of incurring liabilities, including short-term loans, it is worth following several important principles. First of all, we should think about how much money we really need. Let’s not borrow more than necessary, because unnecessary debt can turn into a serious problem when it becomes difficult to pay back. Of course, we will be able to spend any funds, but can we bear the repayment? Let’s plan roughly how long we want to allow ourselves to pay the debt back and also how much money – we will be able to pay back monthly. When we lean and analyze our budget and financial possibilities thoroughly, it will be easier to make a decision to make a commitment that will be tailored to our expectations. And thus, we will protect ourselves against an excessive burden that the household budget could not bear.