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Why is interest higher for short term loans?

1 minute read

If you need money to pay for an unexpected bill, emergency, or repair out of your budget, a short-term loan is for you. There are many loan offers, so knowing the following will help you find the best one for you:

How do they work?

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Repayment periods for a short-term loan range from 3 to 18 months but typically will not go over one year. In terms of approval, there is a greater chance that you will be approved for a short-term loan, mainly because these loans are generally for smaller amounts, so their requirements are easier to meet.

Rates

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Short-term loans come with higher interest rates because you can access the money with fewer requirements than with other loans. Lenders charge higher interest rates to help mitigate the risk of default borrowers. Although, the actual cost will depend a lot on the amount you apply for and the lender’s evaluation of your loan. Annual percentage rates (APR) vary between 8% and can go up to 36%.

Is it the right loan?

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Although long-term loans are better in terms of interest rates and debt terms, short-term loans come with the great advantage of being easier to access. Consider using a short-term loan when you have a significant expense that you need to settle quickly and have trouble meeting the requirements on other loans. Partners such as Upstart offer loans for people with no credit history or low credit scores (300 points).

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Daniel Quiroz

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