Short term loans

What is a short term loan?

A short-term loan, also called a payday loan, gives temporary financial help for a brief time. These loans let people borrow from £100 up to £5,000, depending on your circumstances. The maximum repayment period depends on the amount you lend, and the lender. They start from 1 month up to 5 years, but most borrowers with small loans choose to repay the loan in less than a year.

Characteristically, short-term loans are unsecured personal loans, meaning they do not require collateral. People call them Payday loans because borrowers often repay them on the next payday or over several paydays. For people with bad credit or no credit history, guarantor short-term loans offer another option for borrowing money.

Sometimes, a trusted friend or family member may agree to be responsible for the debt if the borrower can’t pay. This means that the friend or family member will make payments on behalf of the borrower. One way to ensure that the borrower still pays the debt even if they are unable to do so. This arrangement can help protect the borrower’s credit and financial stability.

Difference of Short-Term loans vs Payday Loans

Short-term loans and payday loans are both types of short-term borrowing, but they work in different ways. Lenders structure payday loans so that borrowers repay them in a single lump sum on their next payday, similar to a one-month loan. On the other hand, short-term loans allow you to make payments over a longer period, usually up to two years.

Furthermore, the borrowing limits for these two loan types diverge. Short-term loans allow you to borrow more money, up to £5,000, while payday loans usually limit the amount to £1,500 or less. Payday loans have higher interest rates because borrowers must pay them back quickly. This is why they often have smaller loan amounts compared to other types of loans.

Loan eligibility and affordability

To qualify for a short-term loan, applicants must match a specific criteria mandated by lenders. To qualify, you must be at least 18 years old, have a job, and live in the UK legally. Lenders will also conduct an affordability assessment, scrutinizing the applicant’s current financial standing and borrowing history to ascertain their capacity to make timely repayments.

A favourable credit score can unlock access to more attractive interest rates. If you have a poor credit score, this does not necessarily mean you need to worry. Lenders might still approve your application, but you might have to pay higher interest rates to offset the risk.

Calculating borrowing potential

To estimate the possibility of a prospective loan, lenders typically offer loan calculators that provide insights into potential repayment scenarios. These calculators consider the loan amount, repayment term, and interest rate to estimate monthly payments and total borrowing costs.

While lenders may advertise specific interest rates, it’s crucial to understand that these rates are not universally applicable. Lenders must offer the advertised rate to at least 51% of successful applicants. The rest may face higher interest charges based on their risk profiles.

Exploring alternative borrowing options

Before getting a short-term loan, consider exploring other options with better terms or lower interest rates. Researching different possibilities before making a decision is important. This can help you find the best option for your financial situation.

A credit card with 0% interest or a low-interest rate can help you make a significant purchase without extra fees. Just make sure to pay off the balance before the introductory period ends.

You can use a 0% overdraft to have extra money without borrowing. You can also switch to a current account with this feature. This will give you some additional funds without the need for a loan.

Money transfer credit cards let you move money from your credit card to your bank account at a low interest rate. However, check to see if there is any fees involved, as there often can be.

The Loan application process

When getting a short-term loan, make sure to do your research and compare different options to find the best deal. Before you choose a loan, be sure to look at the interest rates, APRs, and any extra fees like early repayment penalties.

Understanding all the costs associated with the loan before making a decision is important. Interest rates and APRs can affect how much you end up paying over time. Additional fees, such as early repayment penalties, can also impact the total cost of the loan.

When you apply through I Need Cash, we will review your information against lenders on our panel. We will then pass your information to those lenders who may be able to potential to assist you. This eliminates you having to apply to different lenders to find the right loan for you.

The suitability of Short-Term / payday loans

Sometimes, unexpected expenses can arise without warning. These may include vet bills, boiler repairs, furniture or appliance purchases, car repairs, or needing a laptop for work. In such situations, a short-term loan may be necessary.

Thinking carefully about this decision and looking at all your options is important. You should make sure that the loan amount and repayment schedule match your financial situation.

Paying your monthly bills on time is important. This will help you avoid getting into debt.

Make sure you prioritize your bills over other responsibilities. This will help you stay financially stable. Avoid neglecting your bills to prevent financial problems.

Managing repayment challenges

Despite the best intentions, unforeseen circumstances can sometimes impede the ability to maintain a consistent repayment schedule. In such situations, proactive communication with the lender is paramount. Tell them about your problem before missing payments. You can discuss options like taking a break from payments or changing the payment plan to make it easier on your finances.

You can get helpful advice from trusted debt counseling organizations like StepChange or National Debtline. They can give you tips on how to manage your finances better without making your situation worse.

Responsible borrowing and Credit Score preservation

While borrowing, in any form, can temporarily impact your credit score, responsible repayment behaviour can gradually restore and even enhance your creditworthiness. Paying your loans on time and in full shows financial responsibility and helps improve your credit score.

Missed payments or failed loan applications can hurt your credit, making it harder to get good borrowing terms later on. When borrowing short-term loans, it is crucial to be cautious and ensure that you can afford to repay them. This will help prevent your financial situation from becoming worse.

Are Guarantor Loans an alternative?

For individuals grappling with poor credit or a lack of established credit history, guarantor loans present a potential solution. In this setup, a close friend or family member agrees to cosign the loan. They take on the responsibility if the borrower can’t pay back the debt.

Guarantor loans lower the lender’s risk. This allows people who may not qualify for traditional short-term loans to borrow money.

Being cautious when thinking about this option is important. Not repaying the loan could damage relationships. It could also jeopardize the guarantor’s financial situation.

Regulatory safeguards and consumer protection

In the UK, the short-term lending industry is subject to regulatory oversight and consumer protection measures. The Financial Conduct Authority (FCA) plays a pivotal role in monitoring lenders’ practices, ensuring adherence to responsible lending guidelines, and safeguarding borrowers’ interests.

Lenders cap payday loan fees at 0.8% of the loan amount per day, which is an important rule. This measure aims to lower high interest rates on payday loans and protect consumers from getting into overwhelming debt.

The FCA requires lenders to check if borrowers can afford to repay loans without harming their finances.

Conclusion of short-term loans

Short-term loans can help when money is tight, allowing people to cover immediate costs or fill temporary gaps in cash flow. When borrowing money, you should be cautious and consider if you truly need the loan. Also, think about how it could impact your finances down the road.

To avoid debt, research your options and be realistic about how much you can repay when borrowing money in the short term. Consider other options as well. Ultimately, responsible borrowing and a commitment to financial discipline will pave the way for a secure and prosperous future.