Short-term debt is money you borrow that you intend to pay back within a year or so. Mortgages, auto loans and college student loans are all typically considered long-term debt because the payback period is significantly longer. Short-term debt includes credit cards, personal loans, payday loans and store charge cards.
Credit cards are among the more common types of short-term debt young people take on. With a credit card, you make monthly payments of principal and interest based on the amount you borrow. While credit cards can come in handy during emergencies, such as when you face unexpected medical bills or car repairs, they can also become expensive crutches when you want something you can't afford.
A personal loan is actually short term or long term, depending on the type of loan and the intended payback period. In some cases, a personal loan is a relatively small amount that you borrow from the bank to consolidate credit cards or to start a business. A personal loan is unsecured, like a credit card is, which means you don't have to use personal property as collateral to secure the loan. Instead, your loan limit and interest rate are based on your credit rating.
Payday loans are typically the shortest version of short-term debt. A temporary or payday loan is an amount you borrow for just a few weeks or months. This particular loan type is often viewed negatively because lenders target low-income borrowers in desperate need of money to cover the times between paychecks. The interest rates are notoriously high, according to the website of consumer research company ProQuest. You could expect to pay around $25 to $50 on a short-term loan of just a few hundred dollars.
Store Charge Cards
Store charge cards are actually another form of credit card. However, some avid shoppers are as likely to carry several store cards in their purses as they are to carry traditional credit cards. A store charge card is branded by a retailer but often funded by a conventional provider, such as Visa or MasterCard. A store card usually has a much higher interest rate than a conventional credit card. Borrowers with a modest credit score often pay 20 to 25 percent interest rates on such plastic. Retailers commonly offer deals and perks to get customers to sign up for their cards.
- Berkshire Bank: Short-Term Debt
- ProQuest: Understanding Consumer Debt
- Consumer Financial Protection Bureau. "How to Understand Special Promotional Financing Offers on Credit Cards." Accessed May 13, 2020.
- American Express. "FAQ | Personal Loans." Accessed May 14, 2020.
- SoFi. "SoFi Personal Loans." Accessed May 14, 2020.
- Alliant Credit Union. "Personal Loans for Approved Borrowers." Accessed May 14, 2020.
- LendingClub. "Patient Financing Made Easy." Accessed May 14, 2020.
- Federal Deposit Insurance Corporation. "FDIC: Learning Bank - Credit Cards." Accessed May 14, 2020.
- Federal Trade Commission. "Credit, Debit, and Charge Cards." Accessed May 14, 2020.
Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.