Should I get a short-term loan?
Written by Robert Bester, Consumer Finance Expert Robert has been a writer for six years, specialising in consumer finance and the UK lending market. Concentrating on consumer credit products, Robert writes informative articles that help customers manage their personal finances efficiently.
30th November 2020
3 minute read
Have you thought about whether you should apply for a short-term loan? They aren’t always the first option for those with good credit, but can still come in handy when you end up having to pay for more than you anticipated during the month, or would like to spread the cost of a significant purchase.
Short-term loans are ideal for those who would like to borrow a small amount for less than 12 months, spreading the cost of a purchase you wouldn’t normally be able to afford with an easy repayment each month.
Whether you want to borrow money for 30 days or up to 12 months, a short-term loan is an option that you should consider. Even the Guru needs a helping hand sometimes, normally when he exhausts his supply of Cedarwood beard oil and desperately needs to order another five litres. The alternative is having facial hair without a woodsy aroma, which is quite frankly, not an option.
What short-term loan is right for me?
A short-term loan is an unsecured loan designed for those who need to borrow money quickly to cover expenses. They are usually taken out over a couple of months, but can sometimes be up to 12 months, depending on how long you would like to spread the cost of your borrowing.
You might have heard of the following phrases when searching for a short-term loan:
- Payday loan – usually taken over the course of a month. They will have a very high interest rate, but are only taken out over 1-2 months, simply to tide you over until your next payday
- Bridging loan – often designed for property developers to cover a period in between the sale of an old house and the purchase of another, bridging loans are taken out for between a few weeks and a few months at a time, but at a very high rate of interest. They are usually used as a stopgap to cover payments in between two transactions
Whilst you will still find these phrases being used, they’re still all collectively known as short-term loans, given that they’re under 12 months, with a high rate of interest and available for those with a low credit score.
Why should I get a short-term loan?
Getting a short-term loan normally arises from an unexpected expense that needs covering, that you can’t afford to make in full. Being able to spread the cost of such a payment can make it much easier, eliminating the initial stress of having to pay for something you can’t afford then and there.
Unexpected payments can originate from situations like a faulty boiler, a broken-down car, or perhaps a plumbing emergency at home. It might not be something you’ve budgeted for, meaning that you can end up struggling to afford your regular monthly payments.
Having to apply for a short-term loan will fix your immediate problem of affording a costly payment, but it’s always important to look at the terms of the deal to see how much you can expect to pay on top of your borrowed money.
While the interest rate is often a lot higher than a standard personal loan, it can be useful if you have a bad credit score as they are designed for borrowers with a low credit score.
How long can I get a short-term loan for?
It’s then up to you how long you would like to spread the cost of your short-term loan for. This can be between a very short time such as 1 month, all the way up to 12 months long.
If you would like to spread the cost for longer than this, you might want to look into a personal loan instead, as they can be taken out for a much longer period. However, you will also require a higher credit score in order to be eligible, so it’s always worth checking your credit report first, as well as using an eligibility tool such as moneymatcher.
What interest rates can I get on a short-term loan?
Since you’re taking a quick short-term loan, you will often find that the interest rate is much higher than a standard personal loan. This is usually to reflect the fact that you’re applying to borrow money quickly over a short period. Don’t be surprised to find an interest rate as high as 500-1500%.
This might seem alarmingly high, but if you’re only taking the loan out over a few months you should never get close to paying as much as this. It also highlights how important it is to pay off the short-term loan within the time agreed, as any delay in payments can lead to a high penalty as the interest piles up.
Am I eligible for a short-term loan?
Since you’ll find that short-term loans are designed for borrowers with a low credit rating, you shouldn’t necessarily have a problem with being accepted, unless you have a very poor credit rating yourself. If you haven’t checked your credit report yet or think your score might have changed, it’s always worth checking before you start your search for a short-term loan.
You should never apply for a short-term loan if you can answer no to any of the following:
- Do you have a regular income every month?
- Can you afford to make repayments?
- Do you already have outstanding debts you are struggling to afford?
- Have you already been recently rejected for a short-term loan?
Multiple rejections for a short-term loan can lead to your credit rating being reduced further. Before you do anymore damage, instead try to take steps to improve your credit score, so you will be eligible for better financial products in the future.