3 types of loans you can get to fund your short-term needs

You may want some quick cash to improve the way your house looks or to meet your child’s wedding expenses or just to throw a bash on your 10th wedding anniversary. An easy way is to take a short-term loan to fund your need. While banks and other financial institutions offer various kinds of short-term loans, you should go for the one that suits your needs. However, remember that short-term loans typically come with high rates of interest. So assess your repaying capacity before opting for a loan. Here are three kinds of short-term loans you can get.

Personal loans

These are the most common type of short-term loans and people typically take these to repay credit card bills, medical bills or even to fund a vacation.

Personal loans are usually unsecured and require you to pay back in fixed monthly instalments between two to five years. Interest rates are higher compared to secured loans and can go up to 30-35%. The minimum amount most lenders offer as a personal loan is ₹30,000. Often, banks restrict the amount to ensure your EMI is not more than 40% of your monthly income. This is done to make sure you don’t default on repaying your EMIs.

Bridge loans

These loans, also known as swing loans or gap financing, are temporary loans that are used to bridge the gap between your immediate cash needs and long-term loans.

These are typically used by real estate buyers looking to arrange the down payment of the property they want to buy on a home loan. This loan is usually offered at a higher rate (generally between 13% and 18%) than a home loan as there is no security to back it up.

Bridge loans are often used for commercial real estate purposes to make a quick close on a property deal. Currently, there are 31 lenders, including a few banks such as HDFC Bank and SBI, that offer such loans.

Demand loans

Banks and other financial institutions provide demand loans for your short-term financial needs. These are mostly secure loans; the securities are usually in the form of products like insurance policies and bonds. The loan you can get is typically 70-90% of the value of the security. Just like in an overdraft facility, the borrower has the option to use only a part of the total demand loan sanctioned. The interest rate is decided based on the part of the loan used by the borrower and not on the full amount sanctioned.

Demand loans are largely dependent on the needs of the lender. If at any point, the lender needs money, the borrower is obligated to return the loan amount with full interest without any prior notice. Usually banks don’t ask for repayment before completion of the tenure unless the value of the security is less than the outstanding amount or if the security is maturing in the near future and does not cover the full loan amount.

Compare rates offered by different lenders for different types of short-term loans. Also, read the terms and conditions thoroughly. Short-term loans can be a slippery slope to a debt crisis so never take these for frivolous needs.