What is a Short Term Loan?

Hi Seema,

I see that you want to know what is a short term loan. A short term loan as the name suggests, are loans taken for a short period of time to meet the urgent needs. I belong to a business family so I know how important short-term loans are for the smooth functioning of a business. Businesses or companies usually borrow from banks or other financial institutions to run their daily errands. Companies make use of their bank overdrafts to borrow short term loans in order to meet their working capital requirements. As for businesses, they take short term loans to cover the everyday cost of running their businesses because it is not always that a debtor makes payments instantly.

What is a Short Term Loan Definition & Features:

A short term loan is a borrowing made for a brief period of time to meet the daily requirements of businesses and companies.

The features of short term loans are:

• The rate of interest or APR (Annual Percentage Rate) is higher as compared to long-term loans since the period of the loan is shorter. The short tenure of loans restricts the profits of lenders and also since these loans are usually unsecured, there are chances of default loss. That is why the interest rates are set higher. 

• Borrowers need to maintain a good credit score to take short-term loans.

• The repayment of both the principal amount and the interest requires to be paid in full.

• Personal Loans:

  These loans are taken for personal use like marriages, education, and renovation of a house. etc. They are collateral-free and hence bear high risk. So, these have high rates of interest.

• Overdraft:

  This facility is provided by banks in which the businesses or companies need a current account and a sanctioned overdraft through which they can make withdrawals over and above the balance in their accounts.

• Bridge Loans:

  Bridge loans are also called ‘Gap Financing’ or ‘Interim financing’. They serve to bridge the gap between waiting for a long-term loan and short-term cash requirements.

• Demand Loans:

  These short term loans require collateral in the form of fixed deposits, insurance policies, invoices, lease rentals, or accounts receivable.

This was my understanding on what is a short term loan. I hope it was useful to you.