Short-term financing is generally criticized because it’s accompanied by high interest rates. However, it’s often the only solution to get out of an emergency situation and avoid making your finances and—consequently—your credit rating any worse. Here are the main advantages of short-term financing.
A way to deal with an emergency
When you have bad credit and you need to deal with an enormous energy bill, repairs to your car, medical expenses, or loan or credit card due dates, short-term financing is generally the only accessible solution. Obviously, this type of loan is accompanied by significant interest, but it lets you avoid making the situation worse by preventing:
The deprivation of your means of transportation to get to work
The aggravation of a medical condition that requires treatment
Unpaid loans or credit card balances by the due date
The payment of penalties and fees arising from an unpaid item or a default in payment.
A loan accessible without a credit check
Another positive aspect of short-term financing is that it’s accessible to people who have bad credit, even those who aren’t homeowners. Indeed, while conventional banking institutions refuse to grant loans to borrowers with a low credit rating, brokers and private lenders can grant them loans as long as they show proof of a stable situation and their ability to stick to this new commitment. In addition to letting you deal with emergencies, this type of loan can also be used to finance repairs to your apartment or house, to purchase a new vehicle, for studies, or for a vacation, without needing to provide any justification.
With short-term loans, debts are paid off quickly, which lets you pay as little interest as possible, even though the interest rates are high. This also means that, once the loan is paid off, a person who has a bad credit score can start rebuilding their credit immediately. They must review their budget by striving, for example, to limit their debts—mortgage and car loan included—to 30% of their income, to avoid applying for new loans, and to limit the use of their credit card to one third to half of the authorized limit so that it only produces a beneficial effect and lets them regain points on their credit rating. At the same time, to accelerate the increase of their score, they can apply for a personal loan, a line of credit, or a credit card with a deposit as security and only use it within the limit of 30 to 50% of the authorized maximum. Used seriously, the secured card can usually be replaced by a conventional credit card, which lets them continue to improve their score, as long as they always pay their bills on time and only use it up to half of the limit.
Short-term financing isn’t suited to every need. However, it’s the ideal solution in case of an urgent need for money and often the only option for people with a bad credit rating. Furthermore, if it is repaid quickly, not only is the interest limited, but, once paid off, it also lets you start rebuilding your credit over the long term.