Do Short Term Loans Affect Your Credit Rating?

It is not always easy to find the cash you need to fund your business. It is even harder if your credit is less than stellar. You may have heard that borrowers with poor credit history might have an easier time getting approved for short term loans. You may have also heard that these loans can come at a higher cost. And, of course, require a quicker repayment turnaround. So, if you are considering one of these business loans, that might lead you to the question. Do short term loans affect your credit rating?

No Simple Answers

The short answer is, its complicated. Short term loans affect your credit rating, as do as any other loan. Any time you borrow money and pay it back according to the loan’s terms, your credit rating improves. If you don’t pay your loan back, your credit rating suffers.

The risk of a short term loan affecting your credit rating is in the loan’s terms. Most require daily or monthly payments. They usually come with higher interest rates than longer term loans. And even if you are not able to pay – say you are tight on cash flow or haven’t gotten your incoming invoices paid yet – you are still on the hook. And not paying your loan bills could be ruinous for your credit score.

There is actually a different question you should be asking, too. Are short term loans the only option if your score isn’t perfect? The good news is that there are a ton of options out there. They exist for borrowers with a variety of credit histories. You will just need to do some research to find the right fit. Here, we will show you how short term loans could affect your credit rating.

All Loans Affect Your Credit Rating

You always expose your credit score to change whenever you borrow money. Be it due to a £10 credit card purchase or a billion pound bank loan. When a lender allows you to borrow money, you make a promise that you will repay it under certain terms. Your credit rating is a numerical reflection of whether or not you stay true to your word and pay your bills. It is not a reflection of your history with debt.

So, just like any other kind of loan you might get, short term loans could affect your credit rating negatively. If you pay your loan bills in full and on time, then your short term loan might actually boost your credit score. But short term loans may be harder to pay off than other types of loans. Typically, these loans require expensive and frequent payments. You only have a short period of time to pay them off. If you cannot afford to make those daily or weekly payments, or are worried about short term cash flow, you may end up damaging your credit in the process.