Short term loans are generally used for unexpected emergency expenses such as medical bills, overdue household bills and essential vehicle or home repairs.
Running low on cash happens to the best of us, but when you're in a rush to get your hands on some cash you generally tend to accept the first loan which you find.
To avoid this you should understand some crucial aspects of these loans and the different deals you may have available as well as some alternative ways to get extra cash.
As with any financial decision you should always be certain that you actually need the money and that you’ve explored alternative ways of getting a loan – whether by borrowing from a family member or simply selling some things you no longer use – there are a range of fairly decent ways to get cash fast and at little extra expense.
If you’ve worked through these and still find that you need a loan then you should ensure that you budget for it so that you can be certain that you can afford to make the repayment. Falling into a vicious loan cycle will be highly detrimental to your finances – so remember that a short term loan must be considered only for financial emergencies that requires more money than you have to handle.
Before you take out any type of loan...
Understand the conditions of the loan. This includes exactly how much you have to pay back and by when, as well as what will happen if you do not manage to repay the loan by the set date.
Short-term vs Long-term cash loans
Short term loans come in a variety of different forms, one of the most well-known being that of a payday loan.
A payday loan is a short term loan taken out with the understanding that the entire sum borrowed, plus interest, will be taken from your next pay check. We’ll discuss payday loans in a little more detail below.
Loans referred to as short term loans can have a loan term of anything from a few days to a year (and in some cases more). The primary difference between a short and long term loan is obviously the time period within which the loan must be repaid but the difference that will have the biggest affect on the borrower is that of the higher interest rate. Short term loans carry significantly higher interests rates than long term loans like car and house financing.
Another difference is that a short term loan is easier to get since the requirements are not as stringent as with long term loans and there is no long waiting period to get approved or receive the money – it all happens really fast.
The reason that the interest will be higher on a short term loan is that micro lenders generally don't run credit checks or require any collateral for the loan – so they assume a greater risk of not having their money repaid. That being said you can get a short-term loan with both good and bad credit scores and there are hundreds of traditional and alternative providers.
Most short term loans, particularly those where collateral is needed, no credit check will be required and if it is, chances are providers will do a “soft search”.
A soft search is simply a credit search that will not show up on your credit report.
A hard search is the same credit search as that is conducted for a home or car loan.
Credit Card vs Loan
The first and most affordable way to get finance when you need it is by using a credit card. Using a credit card instead of getting a loan can work out to be a lot more cost effective. If you have a good credit score this should be no problem for you however you may, have a credit limit that is below the amount you need.
If you’re looking to make a new purchase than using a 0% interest spending credit card is the best way to do it.
The important thing here is that you repay the amount within the specified time – or at least arrange a balance transfer to another credit card to give you some additional time to pay without incurring fees.
If you can’t pay what you need to pay on a credit card, for instance if the retailer doesn’t accept them, there is one other way to still use a card and minimise the cost by using a money transfer card. A money transfer card will allow you to move money from your spending credit card to your regular account at a minimal fee – you can simply speak to your bank about this option and the attached fees. Since most credit cards will limit you to £5,000, if you need more than it may be best to look elsewhere.
The second place anyone looking for a short term loan should consider is a Credit Union.
By law credit unions cannot charge more than 3% per month on any loan.
This works out to a decent APR of just over 40% but rates are usually well below this. Note that some credit unions will require you to be a member to qualify you for a loan, simply search for your nearest credit union and inquire about the requirements. Supporting your local credit union can help them support other needy families and individuals and considering the good rates they offer – using a credit union is a good idea. If you're on benefits then you should consider applying for an interest-free loan budgeting. This is done through the social fund and is definitely the best option available to those who have been claiming some form of benefit for 26 weeks or more. The loan will usually be deducted from your regular benefits as agreed with the social fund.
Alternatively, if you have good credit you can simply take out a personal loan at a bank – don't be afraid to negotiate the rate, if they agree you'll save and if they don't, no harm done.
Just keep in mind that the smaller the loan the higher the interest will be.
The highly controversial – Payday loan.
The next and most well known option would be that of a payday loan – highly controversial due to the high APR but fast and effective. An APR or, Annual Percentage Rate that you should become familiar with as it will show you how much a loan will cost over a period of a year and is a key metric when comparing different loan options because in addition to the interest charged, the APR will include any additional fees.
The role of a payday loan is self-explanatory – to give you the money you need till your next payday.
You obviously need to be employed to be able to get a payday loan and this type of short term loan is best for people that need to borrow a small amount of money really quickly. The whole process can be done online and within less than an hour you'll have the money in your account. As you can now complete the entire process online, no faxing required, this is certainly the easiest way to get a loan – which is certainly the reason for its overwhelming popularity.
The money you’ve lent will be taken out of your account, plus interest when you receive you pay check. Make sure that you fully understand Continuous Payment Authority or CPA, which is when you provide your card details to a micro lender thereby authorising them to take out regular payments from your account. They are difficult to cancel but note that loan providers may not make more than two attempts to take money from your account and they may also not take put partial payments. If you don't make the payment on the agreed date – you will be penalised, this is why payday loans can at times spiral out of control – people find themselves unable to manage the growing debt.
When you accept a deferral or rollover your accepting additional interest and fees as well – so don't go for a payday loan unless you are 100% certain that you can repay it at the end of the month.
Also avoid a payday loan if your intention is to use it to pay off other debts or if you already have an outstanding payday loan. You should not that new regulations prohibit loan providers to make borrowers pay more than double the loan amount.
Many people believe that getting a payday loan will reflect negatively on your credit review but this is only true if you fail to make the repayments on time or if you take out multiple payday loans because this will indicate that you have serious financial pressures and cannot manage your money.
If you are responsible with the payday loan and do not over use them it should have absolutely no effect on your credit rating.
Cheque-based payday loan
Another similar option to the regular payday loan which may be cheaper and viable to those with bad credit is the cheque-based payday loan. With this type of loan you are required to send a few blank cheques and a cheque guarantee card to the provider. It is cheaper because APR’s are usually lower and great for people with bad credit because providers don't always conduct a credit check. Since you have to post the cheques to the provider – you will have to wait at least a day or two before you will receive the loan – so if you need the money urgently, this isn’t the best option.
A good alternative to such short term loans would be to arrange an authorised overdraft with your bank because it will work out to be cheaper than a payday loan – provided that you stay within the set limit.
Another option is that of a logbook loan.
If you own a vehicle you can use it to secure this type of loan where you will be able to loan more than you can with the other options mentioned above. As you're using your vehicle as collateral if you don't keep up with payments you will have your vehicle seized, so it’s a very risky option if you're not 100% confident that you can repay the loan.
The benefit with this type of loan is that you are not subject to a credit check – since the loan is secured against your vehicle, so people with bad credit can apply. The repayment terms are quite flexible and can range from short term to long term (up to 48 months) but be aware that the APR is higher than with almost all other types of loans and most importantly if you fail to repay the loan and your car is seized – you lose the entire car regardless of the amount your borrowed.
This means that you could lose your entire vehicle even if you just borrowed £2,000; find out the policies regarding this before agreeing to anything.
The final option we’ll discuss is that of using a pawnbroker.
Essentially you exchange goods of value for a loan – if you don't repay the loan as agreed your valuables will be sold to recover the money. The pawnbroker will decide on the value of your goods – so you may get a low valuation on the item(s) and this is simply one of the downsides you'll have to accept.
APR’s are generally not bad – in some cases much lower than any other type of short term loan. This is another ideal option for anyone with bad credit since pawnbrokers don't run credit checks.
To summarise the above, use your credit card for retail purchases, more specifically, a 0% interest spending card.
For the lowest possible interest rates – visit your local credit union.
If you have a vehicle and need a large loan then you can go for a logbook loan.
Similarly if you have any items of value you can visit a pawnbroker for a loan with a relatively low interest rate.
A payday loan is definitely the fastest and easiest way to get a loan but remember that rather than getting a payday loan you could request an authorised overdraft with your bank which will save you money.