Pros and Cons of Short-Term Loans
Maria Micklewhite

Sometimes you need a quick cash injection to help you meet a financial emergency. If you need money fast, you might consider online short-term loans as an option. These loans are popular among those who want to borrow up to around £1,000 and repay it quickly.

Short-term loans do not represent a major financial commitment and can be in your account within hours of applying, but there are also come drawbacks to this type of loan. Here, we take a look at the pros and cons of short-term loans.

What are short-term loans?

Short-term loans are unsecured personal loans. This means that you don’t have to offer up assets to secure your loan, such as a property. Unsecured loans are offered to borrowers based solely on the outcome of checks on indicators like employment status, income, and credit rating.

Short-term loans come in a few different guises, including payday loans, bad credit loans, and installment loans. Because they are unsecured and relatively high-risk for lenders, online short-term loans are usually low-value loans of a few hundred pounds. Repayment can be required in a single installment on your next payday when borrowing from a traditional payday lender, or you can spread repayments over a number of months, as with an installment loan.

Some short-term lenders might offer a line of credit, from which you can withdraw cash as and when you need it. Bank overdrafts are another form of a short-term loan worth considering, as they also offer you quick access to cash and flexible repayment terms.
Advantages of short-term loans

They are quick

One of the main advantages of short-term loans is that you can often access money very quickly after applying successfully. Online short-term loans are widely available and, for those who meet lending criteria, the funds are often in your current account on the same day that you apply.

They are simple

Applying for a short-term loan online is usually really simple, You will be asked to supply some basic personal information, as well as evidence of your financial status. Lenders will want to know whether you are employed and how much your salary is. They may also ask for your address details and could check your credit history, which will allow them to find out whether you’ve had trouble repaying debts before.

If the lender needs extra information before approving your loan, they will be in touch quickly to request this. Otherwise, the simple online application form is often all you need to fill in before the money is in your bank.

There is plenty of choices

Gone are the days when we all needed to rely on our high street bank to provide us with loans. Borrowing online has become the norm and consumers are increasingly confident dealing with online financial services companies that often offer more flexible terms and better rates than traditional banks.

Options for bad credit

Short-term lenders can often consider lending to you even if you have a poor credit history. This is because they can keep loan values small and interest rates are often quite high in order to mitigate the risks involved. Some lenders will consider lending to borrowers with poor credit ratings providing they can demonstrate they have a regular income in order to repay the loan.

They are highly regulated

Providing you borrow with a lender authorized and registered with the Financial Conduct Authority (FCA), they are bound by responsible lending requirements. This means they have to check that you can afford to repay the loan and must behave ethically and responsibly towards those who struggle with repayments.

Disadvantages of short-term loans

Higher interest rates

Because unsecured short-term loans carry greater risks for lenders, in terms of the likelihood that borrowers will default, interest rates can be higher than for some other types of loan. When choosing which short-term loan provider to go with, it’s wise to check the Total Amount Repayable (TAR) figure, and the interest rate charged.

The Annual Percentage Rate (APR), which is the legally required figure advertised by many lenders, is next-to-useless when comparing short-term loans as they display the cost of the loan as a percentage of the total loan amount for an entire year. As short-term loans are only ever taken out over a few months, comparing rates for an entire year does not give a helpful point of comparison.

Extra charges/penalties

Most short-term lenders charge late payment penalties and/or arrangement fees. It’s vital that you check the terms and conditions before applying so you are comfortable with these extra charges. Also, look about for early repayment fees if you want the flexibility of repaying your loan early.

Despite the possibility of extra charges, FCA regulations now protect consumers from building up a debt spiral by capping total interest charged on short-term loans.

At the height of the payday loans scandal, some borrowers found that their interest and charge were mounting up faster than they could keep up, especially if they missed a payment at any point. Now, caps are in place to protect consumers, and, providing you don’t borrow more than you can afford to repay (and checks should prevent you from doing this) you should be able to have a successful borrowing experience. You may even improve your credit rating in the process.