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Last updated: 25 August 2021
Twiddling our thumbs until payday – we're all pretty good at it. But what do you do when an emergency with a price tag plonks itself in front of you?
A short-term loan can be a quick and effective injection of cash. We take a look at how they work, what to expect and how they compare to other ways to borrow money.
What are short term loans?
Short term loans are repaid over a maximum of one year – a repayment term much shorter than for traditional personal loans. Generally, they can offer relief when unexpected or unavoidable expenditures come up, like something going bust in your car. They're a short-term solution only - they should not be used as a long-term plan for borrowing money. Because they're shorter, you tend to get much higher interest rates, so even cheap short term loans will cost you.
Check out our short-term vs long-term loans page for more info on how the two types of loan differ.
How much do short-term loans cost?
As we mentioned, short term loans carry a hefty APR, which is how much interest you would pay over a year. Loan companies earn their money from interest (we're not given it for free!). With longer term loans, lenders are guaranteed to get a consistent monthly sum for an extended period, with the longest loan term generally being up to 35 years. That's a lot of monthly interest.
So how is money made on short-term loans? The astute of you will have clocked that they're not going to earn as much of interest in six months as they will for six years. To account for this, APR is therefore much higher.
When you start to compare short-term loans, regardless of the loan term there will be an APR displayed. But this can be pretty confusing to work out how much the loan will actually cost you. Instead, it's now fairly standard for loan comparison sites to just show the total sum you'll have to pay back overall too, rather than just all that acronym malarkey.
Recent legislation was introduced by the Financial Conduct Authority to stop exorbitant interest rates. Previously, it was legal for people to ultimately pay back what they borrowed several times over when accounting for interest, which was particularly the case for payday loans. Now, the maximum amount you can be charged in interest equals the sum you borrowed. Still, not ideal if you're taking out a £1,000 loan!
How much can I borrow?
Sums tend to be much smaller with short-term loans – enough to tide you over. Remember as well that the longer you borrow, the more you pay back in total. You should be wary of short term loans offering thousands; if you need to borrow within this region then look for long-term deals where cheap loans will be more abundant with better rates.
What are flexible loans?
For short-term borrowing it's possible to get flexible loans. One benefit of these is they allow early repayments without penalties, so you can be more flexible with managing your finances. Some also let you specifically choose how much you want your monthly repayments to be.
Conversely, long term loans – those lasting over a year – will have binding repayment plans. That means that should you want to pay off your loan prematurely, you'll be met with early repayment charges.
However, do be aware that with great flexibility comes great caveats: you'll likely get higher interest rates with flexible loans, so definitely weigh up the pros and cons.
What to consider before taking out a short term loan
Before you compare short term loans, be acquainted with other ways to borrow money. Loans always come with interest and you'll end up paying back more overall.
Depending on how much you need, see whether a (very supportive) friend or relative could help you out. You'll avoid paying interest so will save money in comparison to taking out a loan.
Have you got solid income and a good credit history? If so, credit cards are another great short-term way to get money. Most credit cards offer 0% APR for a set period of time – how long that is will depend on the provider. As a result, you can borrow on your credit card without paying interest. Be aware, though, that nothing lasts forever and after that enticing grace period is up, you'll be charged interest if you fail to balance your account monthly.
Consider overdrafts, too, which are also for smaller amounts - typically up to £2,000. You can check with your bank if you qualify. Whether or not you get a competitive interest rate compared to a loan depends on your bank, but you can pay your overdraft off in one fell swoop should you wish without incurring early exit fees. Subject to your circumstances, an overdraft could be the best way to borrow money.
How to get the best short term loans
It's important to be realistic. You should only apply for a loan if you're confident you'll pass the credit check and be accepted. If your loan application is rejected, it'll have a negative impact on your credit score and show up on any future applications or checks. Be sure you have a real dig around in their acceptance criteria so you know what's expected of you. If you're unsure, err on the side of caution and don't apply.
If you've got a bad credit rating, we'll admit there could be a few more hoops to jump through. It's therefore essential you compare loans
first to see if you're actually likely to be accepted.