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Short-term financing options include unsecured loans, lines of credit, payday loans, venture capitalists, and pension or payroll loans. These options are best for short-term use due to varying interest rates and higher rates for bad credit borrowers.
Borrowers often borrow short-term to avoid paying the closing costs and long-term finance charges associated with multi-year debt instruments. Short-term sources of financing include unsecured loans and lines of credit available through commercial banks. Borrowers can also get credit from payday loan companies, venture capitalists, and some employers offer pension or payroll loans.
Revolving lines of credit are among the short-term sources of financing that businesses use to purchase inventory. Interest rates on lines of credit are typically linked to government interest rate indices, which means that payments on the debt vary from month to month. In the long term, borrowers are exposed to the risk that rising interest rates could cause a substantial increase in debt payments. Therefore, lines of credit are best suited for short-term use, since interest rates do not tend to rise dramatically over periods of several months rather than several years. Many consumers facing temporary cash flow shortages often use unsecured lines of credit to cover everyday expenses.
In addition to lines of credit, most banks also offer short-term installment loans. Borrowers can take out our unsecured loans, and although the interest rates on these loans are higher than the rates available with secured loans, closing costs are often much lower. Among the short-term sources of financing available to borrowers, these loans are particularly attractive to borrowers who want predictable monthly debt payments. As with lines of credit, installment loans are generally only available to borrowers with good credit.
Some consumers apply for payday loans to cover bills that are due before payday. Check cashing companies generally charge upfront processing fees and interest on these loans. Borrowers pay off the debt by giving their paycheck to the lender. In addition to formal payday loan agreements, some people enter into informal payday loan agreements with friends or family.
Investment firms and venture capitalists sometimes provide short-term financing to individuals and businesses. These entities often charge higher interest rates than conventional lenders, but borrowers with bad credit often turn to these lenders after being denied credit by commercial banks. In addition to lending to bad credit borrowers, venture capitalists also finance speculative ventures that banks may refuse to finance.
Loans for pension plans are among the sources of short-term financing that some consumers turn to in times of difficulty. In many countries, people facing severe financial hardship involving possible foreclosure, eviction or legal fees can sometimes get short-term loans that are secured against company pension plans. In addition, short-term financing sources available through some employers include paycheck advances, in which workers receive their wages before payday. Employers may assess interest or charge administrative fees for these payday loans.
Smart Asset.
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