Real Estate Lenders: What Is a Lender in Real Estate?

A lender in real estate is a company that lends you money to purchase property. This lender might be a bank, broker, or another organization. They’ll evaluate your ability to pay back the loan before approving it and help you refinance later on if appropriate. Lenders are necessary for most buyers seeking property who don’t have enough cash to purchase upfront. A few different types of lenders exist, offering products from traditional mortgages to short-term hard money loans, and which one you choose depends on what exactly you need and what your situation is.

In this guide, we’ll cover what a lender in real estate is, the different types of lenders, and more, so you can better understand your options when it comes to getting financing for a property.

  1. Banks
  2. Mortgage Brokers
  3. Hard Money Lenders
  4. Credit Unions
  5. Retail Lenders
  6. Direct Lenders

What Is a Lender in Real Estate?

What does a lender do in real estate? Exactly what the name implies. The lender lends money for transactions involving property purchases or modifications. These loans may be short- or long-term, and the entire lending process may be done through private companies, or they may involve the government at some point, such as with the Federal Housing Administration’s guarantees of some home loans. Additionally, it’s important to note that there may be a fee for working with the lender, which is something to consider when looking for financing.

What Is a Mortgage Lender?

A mortgage lender is a lender that specializes in issuing loans for mortgages. In other words, it’s another term for a lender in real estate. Not only will a mortgage lender loan you the money you need to purchase a home or property, but they’re also responsible for managing your loan on a daily basis by responding to inquiries, tracking the interest and principal paid, and more.

What Are the Different Types of Lenders in Real Estate?

You have a number of options when seeking a lender. The one you choose depends on what qualifications you have, how quickly you need the loan, what benefits you get by using that lender, and whether you want to deal with an intermediary or a company that issues its own loans. You can also choose to work with a broker, who is not a lender, but someone who helps you find a lender. Explore some of the different types of lenders in real estate below.

1. Banks

Banks are one of the most common sources of mortgage loans for many people, and going to one’s bank to inquire about getting a mortgage loan is often what people assume they have to do if they want to buy property. Most mortgage lenders do work through banks, and while some banks fund their own mortgage loans, most work as a middleman, approving the loan but getting the actual funds from a wholesale lender. That wholesale lender does not work with the public, so you would not be able to get a loan directly from them. Banks may offer special deals for their customers, but anyone applying for a mortgage at a bank, even their own, can expect higher interest rates and a long wait for approval compared to other lenders.

2. Mortgage Brokers

Brokers are not lenders. Instead, these are people who help you find a lender and who help process the loan. The broker searches for the best lender for you by examining factors like rates, repayment terms, and so on, from a pool of potential lenders. Some of these potential lenders are ones who work only with brokers, too. When you go to a mortgage broker, you can find your options for loans have expanded greatly. Brokers do typically charge a commission fee – only about 1 percent – and they take care of the searching and most of the paperwork. You’ll still need to prove that you’re able to pay back the loan, but brokers will handle the communication with the lenders.

3. Hard Money Lenders

What is a hard money lender in real estate? Hard money lenders offer short-term loans that go through fast processing, which is perfect for people who need the money quickly. In most people’s minds, a mortgage is something that lasts 15 to 30 years, but hard money loans usually need to be paid back in just a few years. The trade-off is that getting the loans can be a lot easier and faster, which is perfect if you’re trying to buy a cheaper property that could be snapped up by another buyer who has the money in hand. These loans are great for those interested in flipping homes that they’ve purchased to fix up. If you apply for a hard money loan, you’ll likely have higher interest and origination fees because the source of the loan can be from private individuals rather than a wholesale lender, but the reward is knowing you can gain access to the money sooner.

4. Credit Unions

Credit unions are like banks in that customers approach them for a mortgage, and the credit union loan officer approves or denies the application. The loan might come from the credit union itself (see the section on direct and retail lenders) or from a wholesale lender, just as it would with regular banks. However, credit unions are non-profit entities, so interest rates could be lower than they would be on a similar mortgage loan from a bank. Another issue is that you likely won’t be able to apply if you’re not a member of the credit union.

5. Retail Lenders

Retail lenders can be a bank or credit union that lends money directly to an individual and not another financial institution. In other words, they’re companies that underwrite their own loans, rather than getting the funds from a wholesale lender, who in effect lends money to whatever bank or credit union has requested it. So, your bank could be a lender that gets funds for loans from another organization (wholesale) or one that issues loans using its own money (retail).

6. Direct Lenders

Direct lenders are similar to retail lenders, but they focus on mortgages. A retail lender will have different financial products that its customers can use, while a direct lender will offer only mortgage loans. These direct lenders may have more flexible qualification requirements than retail lenders. However, be aware that direct lenders have only their own products or loans. In other words, if you don’t like their interest rates, you have to speak with another direct lender to find out what that lender’s products are like. And, if you want to get a sense of what the typical interest rates and terms are for these loans, you have to contact each direct lender you’re interested in. You won’t have a middleman in the form of a broker doing this for you.

How Do You Choose the Right Mortgage Lender?

With all these options, you may wonder where to start and how to find the lender that’s best for you. It depends on a number of factors, including:

  • Interest rate: Different lenders offer different rates. Banks and hard money lenders usually have higher interest rates than other institutions and lenders.
  • APR: In addition to the interest rate, you’ll have other fees like origination fees tacked on. The APR is your annual cost of the mortgage as you pay all the interest, fees, insurance, and so on.
  • How fast you need the loan: Do you need the loan as fast as possible, or do you have time and aren’t at risk of losing out on great homes? If you need money fast – not just approval, but the money – then a hard money lender offers the fastest processing times.
  • Origination, underwriting, and application fees: Purchasing property involves a lot of fees, with some lenders offering lower fees than others. Remember, all of these fees affect your APR.
  • Estimated closing costs: Closing costs are a percentage of the mortgage loan that you add on when you finalize getting the loan. These can range anywhere between 3 percent to 6 percent but may be lower or higher, depending on the lender. With property prices on the rise, you’ll want a lower percentage for closing costs.
  • Reputation: Always do your due diligence by reviewing a lender’s reputation through reviews and testimonials, as customer stories often paint a clearer picture of a company’s services and products.
  • Customer service: It’s also important to work with a lender who has excellent customer service, as they can help you quickly and calmly investigate and fix issues, along with helping you manage the loan and ensure payments are applied to your account on time.
  • Loan offerings: What products do the lenders offer? If you don’t qualify for a basic mortgage, do they have other loan programs you might qualify for?

Final Notes: What Is a Lender in Real Estate?

A lender in real estate can issue you a loan for the purchase of a property, whether it’s residential or commercial. Mortgage products are plentiful, and if you don’t qualify for one, don’t give up; you could find several others that allow you to purchase that property you want. Source Capital offers residential hard money loans for residential property purchases that help you become an owner in today’s highly competitive market. If you have more questions or would like a guide to hard money loans, contact Source Capital for help today.

What’s the Average Interest Rate on a Hard Money Loan?

If you want to buy land, flip a home, or invest in a construction project, you will probably need a hard money loan. When you are looking for a loan, it is important to know what the average interest rate is. This way, you can be prepared for the amount of money that you will need to pay back. The average hard money loan interest rate can vary depending on the lender. However, there is an average that can be used as a benchmark when shopping around for a loan.

The average interest rates for hard money loans can be anywhere from 10% to 15%. Some lenders may charge a higher or lower interest rate. Therefore, it’s important to shop around for the best deals for your project.

What Affects Interest Rates on Hard Money Loans?

There are several factors that can affect the interest rate on a hard money loan. Some of these factors include:

  • Your credit score: Your credit score is something that can affect the interest rate on a hard money loan. If you have good credit, then you may be able to get a better interest rate than someone with poor credit.
  • Property type: The property type that you are using as collateral can also affect the interest rate on your hard money loan. Some types of properties may have a higher interest rate than others.
  • Length of the loan: The length of your hard money loan can also affect the interest rate that you will receive on your loan. If you need a longer term, then this could increase the interest rate. However, if you are looking for a short-term solution to your financial situation, then a longer-term loan may not be the best option.
  • Amount of loan: The amount of money that you are borrowing can also affect the interest rate on your hard money loan. If you are borrowing a large sum of money, then you may receive a higher interest rate than someone who is borrowing a smaller amount.

Each of these factors will have an impact on the interest rate that you are charged for a hard money loan. Refer to our guide to hard money loans before you apply for a loan. This will help you to find the best interest rate possible and avoid any surprises.

How to Get Better Interest Rates on a Hard Money Loan?

There are a few things that you can do to lower the interest rate on your hard money loan. Some of these options include:

1. Improve Personal Credit

Your credit score can have a big impact on the interest rate that you receive. If your credit is not good, then you may be able to get a better interest rate by improving it before applying for the loan. You could also look into getting an unsecured personal loan in order to improve your credit score over time.

For example, let’s say that you have a credit score of 600. If you improve your credit score to 680, then you may be able to get a lower interest rate on your hard money loan. This is because the lender will see that you are a more reliable borrower and that you are less likely to default on the loan.

If you are looking for ways to improve your credit score, then this is one option that could help you achieve that goal.

2. Increase Down Payment

Another way to lower the interest rate on a hard money loan is by increasing your down payment amount. If you can afford to put more money down, then the lender may be willing to offer you a lower interest rate. This is because they will see that you are less of a risk and that you are more likely to repay the loan.

Let’s suppose that you are looking for a hard money loan to purchase a property. If you can put down 20% of the purchase price, then the lender may be willing to offer you a lower interest rate. This is because they will know that you have more “skin in the game” and that you are less likely to default on the loan.

You could also look into getting a hard money loan from the same lender. This will allow you to get a lower interest rate since you are already approved for the loan. This is something that can help you to save money on your overall interest payments.

3. Use Multiple Loans from the Same Lender

If you need a large sum of money, then you may be able to get a better interest rate by taking out multiple loans from the same lender. This is because the lender will see that you are a more reliable borrower and that you are less likely to default on the loan.

For instance, let’s suppose that you are looking for a hard money loan to purchase a house. If you need $500,000 and the property is worth $700,000, then it may be wise for you to take out two loans from the same lender instead of one. You could get an interest rate on both of these loans that is much lower than the interest rate on a loan that you would get from a different lender.

This is something that can help you to save money on your overall interest payments. It is important to make sure that you can afford to repay all of the loans that you take out, or else you may end up in financial trouble.

By understanding how the interest rates are calculated, you can better prepare yourself and make sure that you receive the best deal possible.

Interest Rates on Hard Money Loans: Frequently Asked Questions

Is a hard money loan a good idea?

A hard money loan is a good option if you need to borrow money quickly. The interest rates are usually higher than traditional loans, but the process is much faster. This could be a good option if you need to buy a property or if you need to cover some unexpected expenses. Hard money loans are a great alternative if you only need to cover expenses for a short period.

Are hard money loans paid monthly?

Hard money loans are usually paid back in monthly installments. This can help you to spread out the cost of the loan over time and make it easier for you to pay off the debt. You will need to make sure that you can afford these payments each month before taking out this type of loan, especially if cash flow is already tight.

Are hard money loans interest only?

Hard money loans are not always interest only. An interest only loan has a payment that covers the interest but not the principal. It’s a great tool for borrowers who need short-term funding to complete a project. Work with your lender to better understand your loan terms.

Final Notes

The average interest rates for hard money loans may not represent what an individual lender charges. If you need a loan and are looking for ways to get a lower interest rate, then hard money loans may be a good option for you. The interest rates on these loans can be higher than traditional residential hard money loans, but the process is much faster. By understanding how the interest rates are calculated, you can better prepare yourself and make sure that you receive the best deal possible.

In addition, if you are going to apply for a hard money loan, Source Capital may be able to help. We offer competitive interest rates and a quick approval process. Contact us today to learn more about our loans and how we can help you get the money that you need.

How To Become A Hard Money Lender

How To Become A Hard Money Lender

Many people require loans to meet their financial needs. We all know the primary source of acquiring loans, i.e., from financial institutions such as banks and credit unions. Nowadays, it is quite easy to acquire a loan. However, the process is still time-taking. The borrower is only eligible to acquire a loan if he fulfills certain criteria. This includes details of creditworthiness, DTI (debt-to-income) ratio, financial or debt history, social security number, proof of the reason for requesting a loan, etc. What if the borrower does not meet these requirements? Or what if he does not possess enough time until the issuance of a traditional loan? The alternate and immediate solutions to this problem are provided by hard money lenders.

What Is Hard Money Lending?

Hard money lending is often heard when talking about real estate investment. This type of lending is secured by land or property. i.e., a hard asset; hence the name. It is often known as asset-based lending. Hard money lending is also called a bridge loan or short-term asset-backed bridge loan (STABBL). This is because a hard money loan is suitable for meeting immediate, short-term financial needs.  

Real estate investors or developers, property flippers, or renovators often need immediate funds to commit a deal. Traditional financing organizations, like banks and credit unions, do not promote hard money lending. Also, they issue loans after a lot of paperwork and have a prolonged approval procedure. Thus, the quick and easy resources in such a situation are individual financiers, companies, and private money lenders rather than banks. The hard money lending process is neither time-consuming nor requires approval procedures. It solely depends on the asset value over which the loan is demanded. And it has no concern with the financial stability of the borrower.

However, this can be quite risky. Private lenders require a down payment and extend hard money loans over a greater interest than other conventional financing organizations. Also, the loan term is shorter, within which the debtor must pay back. Hard money lending involves one-to-one correspondence between the borrower and the lender. This creates room for flexibility in terms and conditions decided between the debtor and lender.

Who Can Be a Hard Money Lender?

Hard money lenders can be big firms, private individuals, or groups of investors looking for short-term investments. They provide immediate loans for a short time over a high return rate. Borrowers often choose hard money lenders when they require quick finance for investment. Or when they fall short in the criteria of acquiring a loan from banks.

The hard money lender assesses the risk of the debtor. The higher the risk, the larger the amount of interest. The lender also inquires about the value of property or land used as security. Terms and conditions, including the amount of loan, payback time, and interest rate, are then decided between the two parties. The amount of loan depends on the LTV (loan-to-value) ratio. It is between 50% and 70% of the asset value. The loan period ranges between 1 and 3 years. Borrowers can pay back the lender’s amount either all at once or through small paybacks.

People or companies with excess and spare money from an investment point of view can be hard money lenders, especially those looking forward to multiplying their revenue in a smaller span and reusing it in the near future. Hard money lending can also be a better option for individuals holding a savings account because the interest rate is higher as a private lender. Individuals also make passive income through an indirect share in the real estate industry as a hard money lender. Retired people can be hard money lenders using their retirement savings account. This way, they can better upscale their savings.

What Are the Pros of Being a Hard Money Lender?

Borrowers, mainly real estate developers, investors, or flippers, need investors to support them with swift funds. In return, they are ready to pay higher interests than banks. The huge interest amount is one of the top prizes an individual enjoys being a hard money lender.

Real estate is one of the world’s biggest markets. Being a hard money lender is one way to become a part of this profitable industry besides making a worthwhile profit on investment.

Being a lender doesn’t cost you extra efforts besides scrutinizing the borrower. With multiple modes of payment, the lender receives the loan amount easily while sitting at home or, at most, goes out and collects the amount or check.

You may think that owning a savings account can earn you profit. However, being a hard money lender can provide over 6-15% more profit than a typical savings account. This depends on the interest rate a lender may charge.

As discussed above, hard money lending is also beneficial for individuals aiming for passive income.

Retired personnel can also expand the pension funds in their account by simply being hard money lenders.

Even if a borrower fails to repay the loan amount, the money lender can still get the investment. This is because of the asset over which the loan is demanded.

What Are the Cons of Being a Hard Money Lender?

The obvious and biggest drawback of being a hard money lender is the non-payment of the borrower. In cases when the borrower fails to return the loan amount, the lender’s amount is still protected due to the asset. The lender has the right to file a lawsuit against the borrower. However, the legal procedure can be bothersome. The recovery time is quite unpredictable.

Being a hard money lender calls for great attentiveness and cautiousness. A hard money lender must know the real estate and concerning investment strategies. The lender can minimize the risk with a thorough evaluation of the borrower, risk and default assessment of the borrower, and the property value.

How Do I Become a Hard Money Lender?

It may seem effortless to become a hard money lender. Getting started as a hard money lender requires a thoughtful mind. One must keep a sharp eye on the details. Here are some important checkpoints to analyze if you are the right person with complete knowledge to become a hard money lender:

  • Resource analysis
  •  Investment source
  •  Borrower and asset evaluation
  •  Establish terms and conditions
  •  Ensure proper documentation

Resource analysis

The first and foremost step is to determine the resource of the investment amount. This can be the idle amount lying in your savings account or any surplus revenue. It must be easily accessible and transferable. Make sure your account permits and is favorable for hard money lenders.

The next step is to estimate the right amount you are determined to lend at once. Offering your entire savings to lend might not be a mindful choice. Moreover, investing the entire amount in one place might be too risky. Minimize the risk by investing in various opportunities.

Investment source

After determining your resource capacity, look for the right lending opportunities. For this, you may seek help from a reliable investor through various investment associations. While dealing with an unfamiliar investor, make sure they abide by the regulations and possess the PPM (private placement memorandum) for private lenders. Contrarily, you can seek help from your friends or family associated with the real estate market. 

Borrower and asset evaluation

Once you are into hard money lending, it is important to gain knowledge regarding real estate investment strategies, though all the work is to be done by the investor. But this will help you in the long run. No matter how experienced the investor is, keeping a double check will reduce the risk. Play your part and conduct a detailed evaluation of the borrower and asset value. Carry out the background check of the borrower, either paid or on your own. This will make evident that the borrower is not a bankrupt person, a defaulter, or under trial for previous settlements. Do not invest until you are not completely assured.

Establish terms and conditions

After a satisfactory evaluation of the borrower, you can proceed with the lending. Terms and conditions are necessary for every agreement. The borrower and lender can negotiate and agree upon the loan terms. These terms may include the mode of payment and repayment, down payment, type of interest and interest rate, loan period, etc.

Ensure proper documentation

Many people overlook the documentation procedure. When finalizing an investment deal, no matter how unnecessary it may seem or how trustworthy your relation might be with the borrower, getting an official document must be a part of your routine as a money lender. This will not only protect the lender in case of a problem but also enable both the lender and borrower to abide by the rules. The original legal document must be kept by the hard money lender. A copy of the same documents is to be provided to the borrower. In case of nonpayment by the borrower, the lender can only take legal action upon presenting the original documents before the court of law.

Besides initial documentation, the track record of payback by the borrower must be practiced as well. Once the repayment has started, each payment, along with the amount and mode of payment, must be documented.

Final Notes

Becoming a hard money lender is worthwhile to upsize the savings and earn profit. It is another way to passively step into the real estate market. However, keeping up with the investment strategies and conducting the proper research before investment requires effort. A non-payment by the borrower can be risky. However, legal help can turn the events in favor of the lender. Ensuring the best hard money lending practices can lead you to profitability. Yet, risk estimation and management are crucial in hard money lending.

What is Amortization?

What is Amortization?

Amortization is the accounting process by which the value of a loan or an intangible asset sees its value recording lower as time passes. You often hear about depreciation in the finance world, but amortization sees a lot of confusion for anyone without an accounting degree. So what is the difference and why is amortization so important? Amortization focuses on assets or loans that exist on paper but are intangible. Here, we will dig deeper into the concept of amortization to help explain its use, purpose, and differences between other common financial tools. 

The Definition of Amortization

The term amortization serves two purposes in the accounting world. For that, there are two definitions you need to understand in total. All-in, amortization will do the same thing across both platforms, but the way it works differs slightly.

The first scenario where amortization comes into play is with the intangible asset factor. If you have capital expenses you pay over time towards an intangible asset, the asset will have a useful life put to it. The most common example of an intangible asset is something like a website or a piece of software. As a company, you pay capital to create it, but in the end, you cannot physically hold it. The capital you pay becomes the total you amortize or spread out amortization of, over the useful life of the asset.

The second scenario for amortization has to do with loans. When you have a loan and you are paying off debt with principal and interest payments, the amortization schedule will show the reduction of the balance. A car loan or a home loan are two of the most common examples of when you would get a formal amortization schedule. As you pay your car loan, a portion goes to the principal and the rest interest. The schedule shows the reduction of the loan over time.

How Amortization Works

Amortization is all about calculating value over time. In the situation of amortization expense, as it relates to intangible assets, it starts with the useful life of an asset. As you build a piece of software, you are sending on development costs, training, testing, and more. All this needs tracking so it can see added to the overall cost of the intangible asset. You total it and capitalize the intangible asset on your balance sheet when substantial testing is complete to the point where the software is ready for use. From there, you determine the useful life of the software, usually on a straight-line basis. For software, this is typically 15-years. 

So now say on January 1 you put a $150,000 piece of software into production and add it to your balance sheet. On January 1 of the following year, one year of useful life is gone. You recognize that as a $10,000 amortization expense on your profit and loss for the year, and the value of the intangible asset drops to $140,000 accordingly. This keeps happening until the asset has a value of $0.

Amortization calculations for loans work a bit differently, but with the same concept. Amortization for a loan begins with the outstanding loan balance each month. When a loan first starts, a monthly payment calculation takes place. The interest rate sees calculation against the outstanding loan balance, divided by 12 months. The principal is the amount due, the total for the month, minus that interest payment, and does not change over time.

As the months and years go by, the outstanding loan balance changes as the principal cost brings the balance down. The payment you make does not change, but what happens is the amount of principal you pay over time goes up, while the interest goes down. This is because the interest payment sees calculation over the most recent balance. This is why your mortgage payment will not change, but the principal you pay to the loan continues to increase monthly.

Types of Amortizing Loans

The most common type of amortizing loan is that of an installment loan. Installment loans are loans you pay periodically, usually monthly, until the balance of the loan gets to $0. The common installment loans out there include home equity loans, auto loans, and mortgages or home loans. 

Benefits and Drawbacks of Amortization

There are a lot of benefits and drawbacks when it comes to amortization. On the benefits side of the house, whether you are a business with an intangible asset or taking out an installment loan, it gives you the ability to recognize and pay properly over time. Without amortization, interest may not calculate accurately over the life of a loan. The ease of that simple monthly payment is made possible due to the amortization schedule and amortization concepts in place. With intangible assets, it allows you to recognize the true value of the asset on your balance sheet and expense what you in theory put to use in that year.

The disadvantage of amortization is minimal. You may want to try and lower your monthly payment over time, but with amortization, you cannot as the payment remains fixed while the interest and principal change. For a business, amortization does not allow you to expense the entire cost of building a piece of software or similar asset in the year it is put in use (unless you do a special tax election), thus the expense may drag over time.

What Assets Are Amortized?

The most common types of assets you see amortized include:

  • Software
  • Lease Rental
  • Patents
  • Trademarks

What is the Difference Between Depreciation and Amortization?

Depreciation and amortization are similar in their application. The big difference is that depreciation deals with a tangible asset, such as a house or a car, while amortization deals with an intangible asset, such as the software the company built to install in all their cars. 

What is the Difference Between Capitalization and Amortization?

Capitalization is the amount you recognize as the value of the asset. In short, capitalization is the start of the process to amortize, so they work together but are very different. When you finish filing a trademark, all the costs that went into that go into the capitalized amount. The amortization period begins from the start of that useful life point.

Frequently Asked Questions on Amortization

What Does an Amortization Schedule Look Like?

A common amortization schedule will look just like a chart where you have one row along the top with headers, with the data underneath. The schedule or chart will show how your payment sees distribution over time. You will see the month, the payment, the balance, and how much principal as well as interest you pay monthly with that basis in mind.

What is Reverse Amortization and Could It Help?

Reverse amortization works differently than standard amortization. As the name implies, it works in the opposite direction. Say you are buying a home and you want to start with a low payment, the reverse amortization process works where you pay the smaller amount of interest out of the gate, thus your payment is lower. As time goes by, your payment goes up. This works for many individuals as, in theory, income will increase over time. 

Final Notes

Amortization is unique in its application but can provide a lot of benefits to individuals and businesses. Whether you are applying amortization to intangible assets or to an installment loan, understanding how it works can provide you with financial understanding and the positives it brings with it.  Source Capital is your resource to help you meet your capital needs to make that next big financial move!  

What is a Short-Term Loan?

Short-term loans can be a quick way to gain funding that you might need immediately. They are often for lower amounts, and are typically due not long after they have been taken out. Short-term loans might include options like payday loans, car title loans, and bank overdrafts. While short-term loans can be a convenient option in some cases, it’s important to know that there are also significant financial risks associated with them. 

Read on to explore the various kinds of short-term loans, their uses, and what the advantages and disadvantages of this form of funding are. 

What is a short-term loan? We’ll start with a short-term loan definition. 

Short-Term Loan Definition

A short-term loan is just a loan with a quick repayment period—usually less than a year. Short-term personal loans are one common form of short-term loan, and are usually used when a borrower needs cash immediately and plans on being able to repay the loan soon after taking it out. Short-term business loans are also available for businesses that need a quick starting boost to get them up and running.

Short-term personal loans may have lower credit requirements than other forms of loan, requiring collateral instead—or they may have very high interest rates as a means of securing funding. 

How Short-Term Loans Work

Short-term personal loans work by providing borrowers with cash quickly and efficiently. Rather than the rigorous credit checking and other background requirements often necessary to secure a long-term personal loan, short-term loans use information like your income or require collateral to secure your eligibility for a loan. 

When you take out a short-term loan, you’ll give the lender basic information, like your name, occupation, and the amount that you intend to borrow. If you’re approved, you will likely receive the funds you requested within 24 hours. 

Typical terms and characteristics of short-term loans

Short-term loans are so named because they must be repaid in a short period of time, usually within six months to a year in most situations. Any loan with a period longer than that is referred to as a medium- or long-term loan. Medium-to-long-term loans can have a term lasting from just a few months to 25 years. 

Some short-term loans don’t have a set payment plan or a deadline. They just permit the borrower to repay the debt at his or her own speed. Ultimately, the exact way that short-term loans work depends highly on the lender. Some lenders may have more flexible and accommodating terms. Others might be very strict and have punishing interest rates and penalties for borrowers who don’t conform to the exact terms of the loan. (Find out more in the benefits and drawbacks section below.)

Types of short-term loans

What is considered a short-term loan? There are a few different kinds of short-term loans to be aware of as you begin your search: 

  • Payday loans: This is one of the more common forms of short-term loan. Payday loans are quick and easy to obtain, but often have very high interest rates. They’re called payday loans because borrowers may effectively promise a portion of their paycheck to the lender in exchange for cash right then and there. 
  • Car title loans: For borrowers who own their car outright (i.e. don’t owe money on an auto loan for the car), car title loans can be an enticing option. Borrowers use their car as collateral, meaning that if the borrower is unable to repay the loan, the lending agency will possess the car to recoup losses. 
  • Bank overdraft: Banks charge overdraft fees when an account holder withdraws a greater amount from an account than they actually own. These can be used as a form of short-term loan, but it’s important to know that banks can charge punishing overdraft fees. 
  • Bridge loans: Bridge loans are used to secure financing for a brief period until long-term financing is secured. For example, consumers might use a bridge loan to secure a deal on property before they have secured their mortgage, or a business might use one to purchase an asset before acquiring a long-term business loan. 
  • Lines of credit: Lines of credit, such as a credit card, can be considered short-term loans. This is because they require repayment usually within a month of using the credit. 
  • Merchant cash advance: Merchants may opt for this form of loan to cover assets quickly. Lenders provide merchants with cash, then take a portion of the merchant’s profits until the loan is fully repaid.

Qualifying For a Short-Term Loan

One of the benefits of short-term loans is that they often have less strict borrowing requirements than other forms of medium- or long-term financing. For example, you might not need to have a high credit score in order to secure a short-term loan, which is often a requirement for a traditional personal loan, or even a credit card. 

The exact qualification requirements for a short-term loan will depend heavily on the individual lender. Common requirements include proof of income (especially for payday loans), collateral, or consent to a high interest rate. 

Benefits and Drawbacks of Short-Term Loans

Short-term loans have some significant benefits for people who need cash quickly. However, it’s important to know that they have significant drawbacks. Before you rush to your local payday lender, carefully consider the benefits and drawbacks of short-term loans listed below. 


  • Fast cash: The main benefit of this form of financing is that it’s quick, often getting funds into your account within a single day. 
  • No collateral needed: Depending on the type of loan you apply for, you may not need collateral. Payday loans, for example, do not require collateral. Car title loans, on the other hand, do. 
  • Bad credit may be accepted, depending on the lender: Unlike personal loans, there are usually much more lax credit requirements for personal loans. 
  • Not committed long-term: They’re short-term, which can be convenient if you know you can pay it off quickly. 
  • Some short-term lenders offer payment plan flexibility: Some lenders can be flexible about terms and conditions. 


  • High interest rates: One of the biggest drawbacks of short-term loans is that they can have significantly higher interest rates than personal loans, often over 50% or even 400% interest rates depending on the lender. 
  • High fees: In addition to crippling interest rates, short-term loans can have sky-high fees, making the overall cost of the loan extremely high. 
  • Not a good solution for long-term financing: As the name would suggest, short-term loans do not work well for long-term financing solutions. 
  • Predatory industry: The payday loan industry is notoriously predatory, taking advantage of people who might not fully understand what they are agreeing to, and siphoning money away from some of the lowest-income and most financially desperate communities in the country. 
  • Aggressive collection tactics: For those who are late on payments or unable to pay, they may receive persistent calls and even visits by people attempting to collect their debt. This can also lead to punishing fees and interest rates. 

Short-Term Loans: Frequently Asked Questions

What is a short-term loan good for? Check out our FAQs to find out. 

What is an example of a short-term loan?

Payday loans are a common example of a short-term loan. In this form of financing, a borrower secures funding from a lender by promising to use their next paycheck to pay off the balance of the loan, usually at a high interest rate. Though they are called payday loans for this reason, they may or may not be directly tied to a paycheck.

Are short-term loans good? 

Short-term loans may be a solution in some cases, such as needing to cover rent for fear of eviction, or in rare cases of medical emergencies. However, in many cases, short-term loans can be financially risky for the borrower. 

Where can I apply for a short-term loan?

Lending agencies often have online applications that you can fill out and receive funding quickly and securely. You may also receive a short-term loan through a payday loan shop, by using a large amount of a line of credit (such as on your credit card) or by overdrafting your bank account. 

Final Notes

Short-term loans can be a useful financing option in some rare cases. Short-term loans are effective for covering emergency expenses, or for helping your small business cover initial startup costs before the funding from a long-term financing source has kicked in. 

For all your funding needs, there’s Source Capital. Source Capital is a trusted lender with years of experience supplying funding for everything from personal loans to hard money loans to purchase and flip homes. The next time you need funding, work with our experts to get the money that you need on a timeline that works for your personal or business interests.