Short-term loan – What is it and what does it consist of?



Short-term loans are undoubtedly one of the elements of the offer of Good Finance who is least known to clients. Very often this concept is mistakenly identified with quick loans outside Good Finance. It is true that there are significant similarities between the two options listed, but it does not make them one and the same. By definition, “credit” only applies to services provided by banks.

However, apart from the definition issues, it is worth asking what exactly is the difference between a short-term loan and other types of Good Finance loan? Are such solutions really more accessible than, for example, consumer loans for 7 or 10 years? And finally, taking a short-term loan proves to be more financially beneficial than an installment loan at a loan institution? Below is a brief guide on this topic.

Short-term loan: what is it?

Short-term loan: what is it?

Loans granted by banks can be distinguished and classified according to several different criteria. For example, from the point of view of loan destination, we can talk about mortgage loans, consolidation loans or consumer loans already mentioned.

From the point of view of the duration of the loan agreement, the banks’ offer can be divided into three segments:

  1. Short-term loans (repayment period of up to 1 year)
  2. Medium-term loans (repayment period of up to 3 years)
  3. Long-term loans (repayment period over 3 years)

Of course, the above classification is somewhat arbitrary. Currently, even ordinary consumer loans offered by banks can be taken for a period of 7 or even 10 years, which means that they can approach shorter mortgages in this respect (e.g. those with a repayment period of 15 years).

At the same time, it is worth noting that as a solution for consumers (natural persons) short-term loans usually do not have the character of a separate offer (it is different in the case of companies, which will be discussed later in the text.

What does it mean?

What does it mean?

Based on the assessment of our creditworthiness, the bank may provide us with, for example, a consumer loan offer with a repayment period of 12 months. It goes without saying that this happens when the customer’s creditworthiness assessment is not very favorable.

For example, if we are a young person, we have just started our first job, we do not have savings, we do not have high monthly income and we do not have a credit history – the bank will probably consider us a risky customer. In practice, this may simply result in the fact that, for example, when applying for a loan of USD 10,000 and with a repayment period of 36 months, we will finally be presented with a loan offer of USD 5,000 and a repayment period of 12 months.

Therefore, in relation to loans to individuals, short-term loans will usually simply mean less favorable contractual conditions resulting from the assessment of our creditworthiness.

Of course, this is not an iron rule. Currently, several banks have decided to introduce to their offers solutions that in terms of mechanism of action are very similar to loans in companies outside of. Auguste Dupinych. Let us present it on the example of the offer of one of the banks, whose name will not be required. In the case of the offer in question, the terms are as follows:

  1. Duration of contract: 3 to 36 months
  2. Loan amount: USD 500 to USD 5,000

It is worth mentioning that short-term loan offers are often promotional. Banks are trying to tempt new customers by offering quick and easy loans for a small amount and with a relatively mild creditworthiness verification procedure.

In this way, on the one hand, the bank can actually gain new customers (offers of this type often consist in the fact that the loan involves a commission of 0%, which means that the customer will pay only principal interest). On the other hand, the low maximum amount of this type of loan and short duration mean that the bank does not take many risks when granting the loan.

Short-term loans for companies

Short-term loans for companies

The situation is different when it comes to loans dedicated to enterprises. Here, banks treat short-term loans as a separate loan product. What features will the short-term credit for companies generally have:

  1. Contract duration up to 12 or 36 months
  2. A simplified application and bidding procedure
  3. The relatively low maximum loan amount available

It is also worth noting that short-term loans for companies operate according to a different mechanism than is the case for services addressed to natural persons.

Basically, the entrepreneur will have two options to choose from: a revolving loan every 12 months and a non-revolving loan for 24 or 36 months. Short-term loans for companies are usually a variant inside working capital loans. Also here there is a certain regularity, which was already mentioned in relation to consumer loans, namely: short-term working capital loan will most often be offered to the company when the bank considers that granting a loan for a longer period would be too risky.

However, this does not mean that obtaining a short-term loan for a company does not require meeting certain requirements. When making decisions, the bank will take into account such factors as:

  1. Company financial condition (turnover and net income)
  2. The period of the company’s operation on the market
  3. Possible delays in current payments
  4. The presence of other credit obligations

The amount of credit may depend on the company’s turnover or the value of sales of products or services (banks’ practice is not uniform here). The interest rate on short-term loans for companies is usually in the range of 5 to 10%, but it is also not an iron rule.

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