The term "short-term debt" refers to any loan or line of credit whose term is less than five years, when used in relation to consumer debt. These types of debts offer flexibility and options not available with long-term debts. Most long-term debts are consumer mortgages which are amortized over any length term ranging from 10 to 40 years.
Quick Repayment
Short-term loans give borrowers the opportunity to purchase a new item quickly and to pay it off quickly as well. This limits the overall interest expense incurred by the borrower and allows him to quickly build equity in the item. Additionally, if the item is a depreciating asset, such as an automobile, the short repayment allows the borrower to repay the debt before the asset is worth less than the balance of the loan.
Flexibility
Short-term loans, such as credit cards and lines of credit, tend to be the most flexible modes of lending available on the market today. Each allows a borrower to purchase items at her own discretion, without needing lender approval. Additionally, the balance can be charged up and paid down and charged up again, as the borrower desires.
Less Paperwork and Fees
With short-term notes, significantly less paperwork is needed to process the debt. For example, a credit card merely requires an application in most cases, with no backup documentation. A mortgage, however, requires an application with backup documentation including tax returns, bank statements and pay stubs. Additionally, there are few fees associated with the opening of a short-term loan, other than nominal opening fees in some cases. However, with a mortgage debt, the fees average between 3 and 6 percent of the loan amount.
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