What is a Short-Term Personal Loan?

Home Manage Money What is a Short-Term Personal Loan?

What is a short-term loan? It's more than a loan scheduled to be repaid in less than a year. We'll share the history, present, and future of them.

Short-Term Loan: A short-term loan is a loan scheduled to be repaid in less than a year. When you or your business doesn’t qualify for a line of credit from a bank, you might still have success in obtaining money from then in the form of a one-time, short-term loan (less than a year) to finance your temporary needs or working capital needs.

Money is truly capable of making the world go around. The monetary system evolution can be said that is going toe to toe with that of humankind.

Right from the barter system to paper cash and all the way up to a futuristic currency system like smartphone e-wallets, the whole journey of monetary methods is remarkable.

In the past many historical financial happenings like The Great Depression of 1930 and The Great Recession in the early 2000s, it has been demonstrated economic volatility that spirals out of control.

Since then, the world has witnessed the aftermath of ruptured economics and the lending industry happened to be shapeshifted drastically.

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It might be difficult to cover all the lending types in a single article, hence today we aim at flashing some light on the short-term loans. We will take a look at its current trend and how the future looks.

The history of short-term loans

It is easy to assume that the concept of short-term loans cropped up recently. However, this assumption is not valid and let us share why that is.

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  • Hawala System of 5th Century: The concept began as early as the 5th century in the Middle East and North Africa where people lent money based on mutual trust. Although it is not exactly the same as modern-day short-term loans, the need for fast cash and lenders providing it remains similar.
  • Modern banking concept in 18th-century temples: The religious importance of temples made it safe to store precious metals. Records of loans by priests to common people were found in temples of Babylon which possibly could be the beginning of a modern banking concept.
  • Pawnbrokers and short-term loans from 1930 to 1950: By 1920 banking systems were established. Bank loans were nearly impossible to obtain and so the working class relied on pawnbrokers so much that they used to pawn their tools sometimes to get a loan. Pawnbrokers used to provide small amounts for short-term and borrowers were to pay the original amount plus an interest before the set deadline. If borrowers failed to return they used to sell off the pawned item to make up for the money. They remain the last resort for emergency cash even today.
  • Check guarantee cards in 1970: Check cashing stores became popular at this time. Borrowers deposited postdated checks in such stores and availed cash for emergency needs. Checks served as protection for lenders as with them, they used to get back the lent money as soon as they became due and borrowers usually dated these checks to their next payday dates.
  • Short term loans emerged in 1990-2000s: By this time credit became a norm. The public was more habituated to spend and became comfortable with the concept of borrowing. Safe and convenient internet websites made the process faster and discreet. The lending industry was in full bloom, however, some people overused this facility. Around 2007 poor lending standards and high-interest loans left many devastated.

Short-term loans in 2021

After the reformed strict laws got implemented in 2012, a few flaws were experienced. By 2014 the short-term loan lenders store were are at a peak. In June 2016 the industry decreased by 55% as, Consumer Financial Protection Bureau proposed a rule, which requires lenders to verify the customer’s financial situation and limit the number of debt rollovers allowed.

Today most of the short-term lenders provide online loans using SSL encryption and work on a responsible lending principle. Lenders verify the ability to repay the assessment for loans, provide a realistic repayment schedule and the number of loans lent over the course of a year is now limited.

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Financial help websites provide a simple and user-friendly application process. Then customers are connected with lenders through a safe and secure channel where they can complete their online application. Once they get the approval, the money gets deposited in the borrower’s bank as fast as possible.

Recently, the Office of the Comptroller of the Currency gave a go-ahead to National banks and federal savings associations to lend short-term, small-dollar loans. Credit unions, regional banks, small banks can now start providing these loans if their respective regulators give them a green signal.

The future of short-term loans

Short-term loan lenders are to face competition from banks as top U.S financial regulators are urging them to cater to the small cash borrowers market. However, this means it is good news for customers as they can now expect interest rates to be competitive and affordable enough.

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Few responsible lending nonprofit group members are concerned about a broader deregulatory environment that will make banks give high-cost loans as they used to.

It is projected that borrowers could save hundreds of dollars per year with loans at lower interest rates and are more lenient to pay back the requirements. Banks fear steep losses as loans need to be structured to feature regular payments instead of recovering the amount due in full at loan maturity.

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About the author

Jennifer Scott
Jennifer Scott
Jennifer Scott is a freelance finance writer who’s always looking for a way to save money on her path to FIRE.

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