Short term loans would be the savior whenever you are experiencing a case that needs quick cash. However, one should understand the various interest rates that come with such loans. It would be prudent for them to understand what is to be expected and thus ensure they make informed decisions so much when required. In this blog post, we explore anything you would need to know regarding interest rates on short-term loans.
What are short term Credits?
When you take short-term loans, you have to pay back less than a year. They usually are utilised when one faces financial difficulties without prior warning. Most people find them to be the best as they can access money very quickly. Short-term Credits always have higher interest rates than long-term loans,
What factors affect interest rates?
This is what determines interest rates on short-term loans:
- Loan Amount: Interest rates may vary according to what one is allowed to borrow; the larger, the lesser in interest, and the smaller, the greater the payback rate.
- Tenure: The shorter the repayment period, the higher will be the rate of interest. Since the period in which the lenders have to earn interest is short, they charge more.
- Credit Score: Your credit score plays a very major part. A good high credit score can land you up with a low rate; however lower can fetch a higher rate.
- Lender Policies: Different lenders maintain different policies. Some may maintain lower rates compared to others. So it is always a necessity to seek around.
Types of Interest Rates
Broadly two types of interest rates are prevalent in the market –
- Fixed Interest Rates: These rates remain constant during the repayment term. You repay a constant amount every month. This is great for budgeting.
- Variable Interest Rates: The interest rates fluctuate; they usually begin at relatively low rates but eventually may increase. These may prove to be dangerous because the payments are variable.
Average Interest Rates
Interest rates for short term loans are significantly varied. They could usually be between 5 and 30% or above. A number of factors influence interest rates.Before taking out a loan, you should read the small print to get more information about the interest rates.
What’s the deal with short-term loans having higher interest rates?
Writing about short-term loans usually has higher interest rates for a number of reasons, including:
- Risk: Lenders tend to perceive short-term loans as riskier as there is a higher tendency of borrowers to default since they are often in need of liquid funds quickly.
- Tenure: Lenders need to earn or make money from the money they lend out. Since in short-term loans, the money is recovered quickly, higher interest rates are charged to lenders to make profits.
- Security/Collateral: Most short-term loans are characterized by securities or collaterals. This results in the lenders taking more risks. This automatically induces the rates to be higher.
Ways to Cut Down Interest Rates
While you probably cannot sidestep high interest fees entirely, some of the best ways to reduce the fee are:
- Increase Your Credit Score: The greater is your credit score, the better are your rates. In order to increase your credit rating, just try not to miss payments or reduce debts.
- Shop around: The first offer probably won’t be the best.
- Negotiate: Sometimes, a little negotiation by way of interest rates works with the lender, and he would agree to reduce it. Ask. It causes no harm.
- Co-Signer: Where the credit score is low, a co-signer who has a good credit score helps reduce the rates of interest.
Possible Repayment Rate
Interest rates play a huge role in determining how much you will repay. Higher rates mean you will have to pay more each month and will have paid more altogether by the end of the loan period. Make sure you calculate how much you are likely to repay when borrowing money. You may use online calculators for this estimation.
Hidden Fees and Charges
Apart from the interest rates, you should be keen on any hidden charges and fees. These may fall into categories such as:
- Originating Fees: These are fees charged when the loan processing is ongoing.
- Late Fees: Those related for late payments.
- Prepayment Charges—These include the charges that one has to pay for repaying the loan in advance.
Read your loan document so as to become aware of all your associated costs associated.
Understand the APR
The Annual Percentage Rate is very important. This number includes not just the interest rate but other fees also so that you get a better sense of the loan’s true cost. A good way to compare one loan to the next loan is to rely on the APR.
Conclusion
The interest on some of these short-term loans can be extremely high, so a little perspective can help you make better choices. Just make sure you cover the points from all angles, especially reading the fine print, and if at all possible, Shop Around. This way, you can find a loan that meets your needs without breaking the bank.