Monday 10 June 2019

What You Need To Know About Short Term Loans

Short term loans can be a really helpful way to get cash quickly when you’re in a fix, but there are some dos and don’t's that you need to be aware of before choosing a short term loan.

If you want to find an FCA approved and regulated lender, then offers reliable payday and instalment loans.

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Short Term Loans

Short term loans are (as the name might imply!) a form of loan in which you borrow money over a short period of time. This could be anything from 1 day to 3 months (or sometimes longer) depending on whether you choose a payday or instalment loan.

They can be a really helpful way to cover unforeseen costs, but as with all loans, you need to be careful to ensure you don’t end up in further financial difficulty. We have lots of tips to help you understand when you should look for an alternative to a short term loan and when you might consider one.

What You Need To Know

Instant Cash

This is one of the biggest benefits of short term loans, which include both payday and instalment loans. The vast majority of direct lenders will offer same day cash transfer, giving you the money on the same day that you apply. The advantages of this is fairly obvious; when you need money to pay for a bill, emergency repair or essential maintenance work on that day, you’ll be able to get it.

Necessity vs Luxury

It’s important to understand that short term loans are designed to support necessity rather than luxury. If an unexpected event occurs for which you don’t currently have the funds, then a short term loan can help you to cover the cost before your next payday.

This could be really helpful for things such as car repairs, emergency plumbing, an unexpected bill or similar.

However, they’re not the answer for payments that aren’t a necessity, such as a meal out, a family holiday or a new video game console. While being able to enjoy life is important, this isn’t what short term loans are for as it could land you in further financial difficulty.

For luxury or non-essential things, you could consider budgeting for a ‘fun fund’, which you can use to pay for luxury items and trips. Some people use a credit card to make bigger expenses more affordable by spreading the cost, but it’s important to do this wisely and build repayments into your monthly budget so you know you can repay any credit in full.

Simple Interest

All lenders will charge interest no matter the form of loan, from mortgages and credit cards to short term loans. Payday and instalment loans are the same, but unlike some longer term loans, they calculate the cost of the loan based on simple interest, rather than compound interest. This means that the price you pay for the loan is based on the original amount of money you borrow and won’t change month by month.


Along a similar line, all lenders will specify the APR of your loan. APR stands for annual percentage rate and gives an indication of how much you’ll be charged to borrow money for the year. With loans that are spread over long periods, the cost of repayment is divided to give an average, while short term loan payments have to be multiplied. This means that APR isn’t a good measure of the cost of a short term loan.

If you’ve looked into payday or instalment loans before, you’ll notice that the APR is extremely high in comparison to other forms of loans. This is because the money is borrowed over a very short time, but APR calculates the cost of borrowing over the course of a year. While APR has to be specified by law, it’s more useful when looking at the cost of long term loans rather than short.

For short term loans, it’s better to use the ‘total repayable’ summary rather than the APR to calculate the cost of a loan.

Credit Score

A common question is: do payday loans (or other short term loans) affect my credit score? You need a reasonable credit score in order to get a payday loan. Many direct lenders won’t lend money to people with bad scores who look like they would be an unreliable borrower, but how does a loan affect your credit score itself?

If you borrow money and repay it on time, it could improve your credit score as it shows that you are a reliable borrower. However, it’s worth bearing in mind that your credit file will show that you applied for a short term loan. This can be seen by any potential future lenders.

If you want to get a mortgage but have applied for a short term loan within a certain number of years, it might suggest to a bank or lender that you are in an unstable financial position and they might not offer you a mortgage.

However, if you applied for a short term loan years before, then lenders will understand that it no longer indicates your current financial position and so it shouldn’t impact your ability to get a mortgage.

This means that if you’re hoping to buy your own house within the next couple of years, you should avoid short term loans, but if not, then they might still be a viable option.

Weighing Up Short Term Loans

Short term loans, including both payday and instalment loans, do have advantages that can be extremely helpful when you need money quickly to cover an unforeseen event.

However, they also have some factors and disadvantages of which you need to be aware. It’s usually a good rule that if you can manage without a short term loan, then you should do so and instead use careful budgeting to manage until your next payday.

However, if you know that a short term loan will allow you to cover a necessary cost and you know that you can pay it back without a problem, then it can be a very helpful way to get by before your next payday.

If you need a short term loan and want to find a reliable lender who is authorised and regulated by the FCA, then choose They provide loans from £100 to £300 (rising to £750 for returning customers).

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