Alternatives to short-term loans
Are you looking to borrow money through a short-term loan? Whilst it might seem like the easy and obvious choice if you need to borrow quickly, there are always alternatives to short-term loans, such as an overdraft, getting a credit card or even applying for a guarantor loan.
If your car breaks down or your boiler stops working, it can be difficult to come to a quick decision in the moment, but with a bit of research you can should easily find a few options to choose from (depending on your credit score). Just having a small amount of funding could really help you get through an expensive month, so it’s worth exploring your options before you commit to a short-term loan.
To give you a helping hand, we’ve put together a few alternatives so you can see whether getting a loan is really the best option. Read on to get the facts about short-term loans and what alternatives could get you out of a sticky financial situation.
Short-term loans: the facts
- Loan amount usually up to £500
- Loan term often between 2-6 months
- Choose between fixed and variable rate interest
- APR can be very high
- Low credit rating accepted
You will often find with short-term loans that the interest rate will seem astronomically high, but since you’re only taking out the loan over a short period, thankfully you’ll never have to pay close to what the rate is suggesting.
This type of loan is also ideal for those with a low credit rating, meaning that if you have an extra expense but also have a less-than-perfect financial history, you can still borrow money.
However, like every other form of borrowing, issues can arise if you struggle to afford the amount you’re required to repay. With a short-term loan, the interest rate is so high that extending your loan term (by failing to make repayments) can also have the knock-on effect of dramatically increasing the interest you owe.
How do I apply for a short-term loan with bad credit?
If you think that a short-term loan might be the right option for you, use the following steps, especially if you have a bad credit score:
- Check your credit score
- Check your eligibility with our free moneymatcher tool
- Browse available short-term loan offers
- Consider alternative options (listed below)
- Calculate whether you can afford to make repayments
- If your credit score matches the minimum requirements, you can apply
Remember to always check your credit score and eligibility, as diving in and applying can sometimes lead you to being rejected. If you have already been rejected for credit and are unsure what to do next, have a read of our short guide here.
Why get a short-term loan?
Since a short-term loan is usually down to having an extra expense that you need to cover quickly, a short-term loan can seem like a very tempting option for borrowing.
The reasons for getting a short-term loan are usually because of an expense that is unexpected and you have no choice but to pay, such as a car needing immediate repairs, a plumbing problem at home leading to a flood, or maybe even a medical emergency related to a family member or pet.
If you are happy with the terms and can comfortably afford the repayments, a short-term loan is ideal if you need a lump sum straight away. However, if you have any doubt that you might not be able to make the repayments, or taking out the loan would just land you in more financial trouble, you might want to avoid a short-term loan altogether.
If you’re in the situation where you would need a short-term loan every month or so in order to afford your current expenses, you might want to think about how you can save more money. Short-term loans should only be used as a stopgap rather than for ongoing payments, as they can get very expensive over a longer period.
What are the alternatives to short-term loans?
If you have decided that a short-term loan is either too risky, or you might not be able to afford it, have a look at the following options instead:
- Overdraft – if you already have a current account, a very quick option is to simply apply for an overdraft as part of your account. You will usually have to pay a small fee to use it, but this will be miniscule compared to a short-term loan. If you haven’t got a current account that offers one, you might want to think about switching to one that offers an overdraft instead
- 0% purchase credit card – if you have a good credit rating, you might want to think about a 0% purchase card, as this will allow you to pay for something and spread the cost over the arranged 0% period, without having to pay any interest at all
- Credit builder card – on the other hand, if you have a bad credit score, perhaps a credit builder card would be a better option? You might not be able to borrow much, but if you’re able to make payments every month you can also improve your credit score at the same time
- Guarantor loan – if you’d like to borrow for a bit longer, you might want to think about a guarantor loan instead. This allows you to borrow against the good credit rating of a close friend or family member, as long as they’re happy to take responsibility if you fail to make repayments.
Should I apply for a short-term loan?
Hopefully we’ve given you enough information to narrow down your options and make a final decision on the best way to borrow money, given your current circumstances. If none of the alternatives we’ve mentioned are available to you as a borrower, it might be easier for you to apply for a short-term loan after all. Always make sure you can comfortably afford the repayments and if you can’t, then it might be better to seek financial advice instead of getting into more debt.
Remember to always use an eligibility tool such as moneymatcher before applying for any financial product. This will give you appropriate deals without affecting your credit score in the process.
Written by Robert Bester
Published on 3rd June 2019