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Whatever the reason, short-term loans can be a great financial tool to cover your unexpected expenses, especially if you have no savings, no friends, or other alternative options that may help in an emergency. They are a convenient source of financing for small-dollar needs. 

However, they can often turn into a headache when it is time to repay the principal. Keeping track of different monthly obligations, APRs, and additional charges can easily become overwhelming. Not to mention, if you have to deal with multiple short-term loans at once.

Taking out a longer-term loan to cover your existing short-term loan debt is one option you may take into consideration. This is known as the debt refinancing process, where you replace an existing loan with a new one that pays off the debt of the first one. This way, you may save money on interest and pay off short-term loans faster.

Understanding the ins and outs of how refinance works can help you decide if it is right for you. So, without further ado, let’s get started!

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Short-Term Loan vs. Long-Term Loan: What’s the Difference?

Each of them represents two different types of financing. And here’s why.

  • Speed of funding. Short-term loans are typically deposited into your bank account on the same day of your approval. By comparison, it may take up to seven days from the time a long-term loan is applied until the cash is available.
  • Borrowing limits. Short-term loans Filld can supply amounts from a few hundred dollars up to $1,000 on average. On the other hand, long-term loans can go up to $50,000 and more.
  • Repayment period. Long-term loans have a timeline of up to seven years on average. Shorter-term loans, on the other hand, you need to repay in two or four weeks.
  • APRs. With long-term loans, you may qualify for a percentage rate with the single digits. Short-term loans, conversely, have sky-rocketed APRs and charges that could add up to a yearly percentage as high as around 300%.
  • Borrower requirements. Credit score is not important with short-term loans. Long-term loans, however, will typically require you to have a credit score of around 560 minimum.

As you can see from above, both sources of financing may help you achieve the same goal, yet they function differently. Short-term loans can be faster, involve less paperwork, and be accessed by lenders with soft credit inquiry. Meanwhile, they can cost considerably more than long-term loans, making loans preferable for those who have the time and credit to get them.

Generally, if we are talking about getting a long-term loan to pay off existing short-term loan debts, we need to mention both benefits and downsides of debt consolidation. So, let’s dive deeper into them. 

Benefits of Debt Refinancing 

There are some good reasons to consolidate your current short-term debt, especially if you are struggling to meet regular obligations with your current repayment schedule.

Managing Debt Repayments

One of the most challenging things about repaying several short-term loans is simply keeping up with monthly installments. Consolidating your current debts using a longer-term loan means you have just one payment to make each month, rather than several. This can make managing your budget easier. In addition, you are less likely to forget about the due date when you have just one payment to make.

Saving Money on Interest

Chances are that the long-term loan’s APRs would be lower than the rate you are paying on your current short-term loans. So, debt refinancing could potentially save you money in the long run.

As of October 2022, the average payday loan APR for accounts paying interest was 390%. Meanwhile, the average APR for a personal loan with a 24-month term was 9.16%, according to the Federal Reserve Board.

Downsides of Debt Refinancing

While using a long-term loan to pay off short-term loan debt has some obvious pluses, there are some potential downsides to consider as well.

There are May Be More Debt

One of the significant drawbacks with using a long-term loan to consolidate multiple same-day loans is the temptation to use the money for other urgent needs. This way, you could end up with more debt added to the existing pile of monthly repayments. Your FICO score may be affected as well in the process if you fall behind your payments.

Savings are not Guaranteed

With short-term loan consolidation, you are not always guaranteed to save money. If you have less-than-perfect credit, then the personal loan term you’re approved for may not be that different from the one you’re paying on your short-term loans. This way, debt refinance may not save you much, if anything, at all.

Conclusion

Using a longer-term loan to cover multiple same-day loans could speed up debt repayment while reducing the amount paid in fees. Whether debt refinance makes sense for you can depend on the difference between your current monthly obligations and the APRs you are likely to be approved for with a new loan.

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