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Short-term Financing Options: What They Are, and Which Ones are Best for You

September 10, 2020

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Short-term finance loans, or short-term loans, as they’re also called, can be a very useful way to borrow money quickly for just a short period of time. 

What is short-term financing? It’s a type of loan, or credit, that can be used to solve a temporary financial need. There are several short-term financing options, but most involve borrowing an amount of capital and repaying it over a short period of time, along with the interest charged. 

Canadian retirees use short-term loans for a wide variety of reasons, including:

  • Emergency household repairs
  • Groceries
  • Medical expenses or emergencies
  • Car repairs
  • Everyday bills
  • Unexpected travel expenses
  • Buying a new home before your old one is sold

How do short-term loans work?

Short-term finance loans work very similarly to regular loan options, in that you borrow money and eventually have to pay it back, along with interest. However, the time in which you have to pay it back is much shorter – anywhere between two weeks and 18 months.

Interest rates can also be much higher, because some short-term loans are geared towards people with bad credit, while other short-term financing options charge higher interest to make it worthwhile for the lender.

Short-term financing options

There are several short-term loans available. However, the best one for you will depend on how long you need the loan, how much you need to borrow, your income, credit score and whether the loan will be secured (for example against your home or vehicle).

  • Line of credit: this can be a good short-term financing option for retired homeowners, as rates are typically low, and you have flexibility in when you pay it off.
  • Private loan or mortgage: these are typically one-year loans. It’s fairly easy to qualify for them, if your home has sufficient equity, but set-up fees and interest rates are typically very high.
  • Short-term installment loans: these can be paid back within as little as a year and have structured payments to cover interest and principle, bringing the loan amount to zero at the end of the term.
  • Payday loan: while these are typically very easy to qualify for (this is one example of how to get a short-term loan with bad credit), the rates can be upwards of 300% over a year.
  • Convertible mortgage: these are short-term mortgages (typically six months) with a fixed interest rate. Convertible mortgages can be switched over to a long-term mortgage if you choose.
  • Cross collateralization: this is when you use an asset for a loan that is already collateral for another loan. As well as a cross collateralization mortgage or home loan, it could be used for other loans such as credit cards.

What is bridge financing?

A bridge loan is a unique loan whose sole purpose is to provide funding that is a bridge between you buying a new home and selling your old one.

How does bridging finance work? If you want to buy a home before closing the sale of your old one, a bridge loan in Canada enables you to use the equity in your current home for the down payment on your new one. When your home sale closes, you use the funds to pay off the bridge loan. It’s kind of like short-term mortgage financing.

How long does it take to get a bridge loan? While these loans usually have a quick turnaround, the time needed will depend on your financial situation and the properties you are buying/selling.

Advantages and disadvantages of short-term financing options

Some of the key advantages of short-term loans are:

  • You usually receive funding quickly
  • You only pay interest for a short period of time
  • It’s a good way to pay for emergency expenses
  • Bridge loans can make moving homes less stressful

Disadvantages of short-term finance loan options:

  • Many retirees may not qualify for low-rate short-term loan options
  • If you have low income and/or bad credit, you may pay very high interest (if you qualify)
  • They typically only provide small amounts (except for bridge loans)
  • Bridge loan interest in Canada can be much higher than a regular mortgage
  • Some short-term loan options, such as payday loans, can lead to financial difficulties

A new short-term loan option for homeowners aged 55 and up

CHIP Open is a new short-term financing option available only to homeowners aged 55-plus, from HomeEquity Bank, Canada’s leader in reverse mortgages.

It’s very similar to a regular CHIP mortgage, except that you can pay it back in full at any time, without any pre-payment penalties. Like the CHIP Reverse Mortgage, you can use the funds for anything you wish, such as to pay off high-interest debts, pay bills, cover emergency expenses, or act as a bridge loan.

It’s the perfect option if you know you will have the cash at some point in the near future to pay it off.

CHIP Open can easily be converted into the standard CHIP Reverse Mortgage, that comes with a lower interest rate, should you find that you need to borrow the money for a longer period than you expected.

Pros and cons of the CHIP Open Reverse Mortgage

For retirees living on a fixed income, CHIP Open offers several advantages, some of which you won’t get with other short-term loans:

  • You’re far more likely to qualify for CHIP Open than most other short-term loan options, because you don’t qualify based on income or credit rating.
  • Qualification is based on your age, the location and value of your home, and the amount of equity you have in it.
  • There are no regular mortgage or loan payments to make – you only pay what you owe when you decide to close the mortgage or if you sell or leave your home. This frees up your retirement income for regular expenses.
  • The interest rate and fees are highly competitive in the short-term lending space.
  • If your repayment strategy falls through, you can simply switch it to a regular CHIP Reverse Mortgage, at a lower interest rate.
  • It’s an ideal short-term loan option for people on a limited income.

CHIP Open Reverse Mortgage disadvantages:

  • Only available to people aged 55 or over.
  • You must own your home.
  • Interest rates are higher than a regular CHIP Reverse Mortgage, allowing us to completely waive any early repayment charges that other lenders would charge.

How to get started

CHIP Open can be a great short-term financing option for retirees aged 55-plus. Starting the process is easy – just call us at 1-866-522-2447 to find out how much you could borrow for a short-term loan today!

And remember, you will always own your home and retain the title.

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