How Do I know If A Short-Term Loan Is Affordable?

‘The importance of affordability’

Affordability is the most important aspect of a short-term loan. If you can’t afford to borrow the money, however desperate your situation is, you should not apply for short-term credit. Short-term loans are designed to provide stop-gap support for people who are facing a financial emergency and have nowhere else to turn. This includes having no savings or being unable to ask friends and family for help.

A short-term loan will give you the funds you need to resolve your situation and you will be expected to pay it back over a short period of time. This is usually on your next payday but is usually for a minimum of 3 months. Short-term loans are not designed for long-term borrowing and you should only ever apply for the amount you need and not a penny more. This will keep your loan as affordable as possible.

Reasons that customers take out short-term loans include:

  • Emergency dental or medical treatment.
  • A new window to replace a broken one.
  • A replacement laptop.
  • Emergency veterinary treatment.
  • Urgent car or van repairs.
  • A replacement boiler, refrigerator or washing machine.

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Short-term loans are also really helpful for self-employed people or small business owners who rely on certain things to keep their business running – this might include a laptop, van or tools. Instead of facing a loss of income through being unable to work when one of these things breaks, short-term credit can be a useful solution to keep your business going.

To know whether a short-term loan will be affordable, you need to understand how much it will cost to borrow and what risks there are that can make it more expensive. Ultimately though, how affordable a short-term loan depends on your personal circumstances. Are you in full-time employment? Do you have a one-off bill coming next month that you know will affect your ability to repay the loan? Is your employment stable? These are just a few questions that only you know the answer to. The lender will do their best to assess your creditworthiness and affordability themselves, as we describe in this article, but the onus is on you to be a responsible borrower. Only apply for a short-term loan if you absolutely need it and can definitely afford the repayments.

Your questions, answered

How much you end up paying in total for your short-term loan depends entirely on your individual loan agreement, interest rate and APR. The more money you borrow and the longer the length of time you take to repay the loan, the more you will repay overall. You’re ideally looking for a short-term loan with low interest and a low APR, as this will make it more affordable.

It’s good to know that your daily interest rate will never exceed 0.8%, thanks to legislation brought in by the Financial Conduct Authority in 2015. Their aim was to prevent customers from excessive fees when borrowing short-term credit. The daily interest rate can reduce as the size of the loan and the length of borrowing increase. Whilst you will pay more interest for larger loans over long periods of time, this means that spreading out the repayments can make them more affordable.

Comparing the APR of your loan options is a fantastic way to decide which will be more affordable. The lower the APR, the more affordable your loan will be. APR – short for annual percentage rate – is the standardised way that lenders calculate how much a loan will cost and display it to their customers. The number can differ between lenders due to their specific interest rates and any additional charges, but the calculation behind the number is always the same. Lenders must make it clear what their APR is before you sign a credit agreement with them.

The calculation that powers APR looks at how much money it will cost you to borrow the loan in question over 12 months. When a loan is longer than 12 months the APR is calculated by adding up the total amount of interest and fees, then dividing to create a yearly average. Short-term loans only run for 1 to 3 months so to account for this, the APR is calculated by multiplying the total cost of the loan by 12 to give an average for the year. This is why the APRs on short-term loans are often much higher than those on long-term loans.

If you’ve decided that a short-term loan is affordable and the right solution for your short-term cash flow needs, you can apply quickly and easily online. Compare the available short-term lenders to see which have the lowest APR and interest rate, and the best terms and conditions regarding flexibility. Gone are the days of needing to go into a bank and complete a face-to-face application for a loan. Nowadays, you can use your smartphone, tablet, or laptop to apply online in a matter of minutes.

Once you’ve chosen a lender, double-check your eligibility to apply with them using the bullet points below. These are the main criteria that lenders use when assessing your application for a short-term loan although you may find that your particular lender has additional criteria:

  • Aged over 18.
  • A UK resident.
  • Employed, either by a business or you work for yourself.
  • A UK bank account holder.
  • Receive a regular income.

If you have a bad credit history, this can negatively impact your application, but each lender is different, offering loans to suit different financial backgrounds with a range of terms and conditions. Just because you have a less than perfect credit history doesn’t mean you won’t be approved for a loan.

Once you’re happy that you meet the eligibility criteria, the next step is filling out the application form. You’ll be asked how much money you’d like to borrow, potentially what the loan will be used for, and how long you’d like to borrow it. Short-term loans are – as stated in the name – designed to be borrowed for a short length of time. This is usually between a minimum of 3 months.

The lender will also want to know more information about who you are, your job, and your regular income. You may be asked to provide proof of your residency from the last 3 years, as well as bank account information or payslips. Some lenders also ask for estimates of your monthly outgoings for things like your mortgage or rent, utility bills, regular outgoings, transport, and other common expenses. 

Once the form is filled in and you’ve answered all of the questions, it’s over to the lender to run a check against your credit file. They’ll also carry out affordability assessments in order to ensure they’re as confident about your ability to repay the loan as you are.

If your loan application is successfully processed and approved, your lender will transfer the funds directly into your bank account electronically. There is usually a really quick turn-around on the money being deposited, with some lenders making the payment within just an hour of the loan being approved#. 

Missed repayments equal missed payment fees; other charges, and potentially more interest, accrue if the loan isn’t repaid in full by the agreed date. Missing your short-term loan repayments can really impact the original affordability of your loan and things can get very expensive, quickly. They are not designed for long-term borrowing and many customers who do miss their repayments find themselves spiraling into serious prolonged debt.

Missed payments will also impact your credit score, which can potentially make future credit more expensive to borrow. When you miss a payment, your credit file will be updated with an ‘overdue’ status. If you continue to miss your payments, ‘overdue’ will become a default, which is a red flag that shows you are irresponsible with your finances and are not a good candidate for credit. Whilst this may not prevent you from getting credit in the future, it can make lenders wary of lending to you. This in turn leads to higher interest rates or APRs.

Taking out a short-term loan is a process that should be given serious thought and consideration before going ahead. If you’re worried about whether a loan will be affordable, and you can’t say for sure that it will, short-term credit may not be the solution for you.

Sometimes it’s best to get an expert’s advice on your situation. Our team at The Money Shop is on-hand to answer any questions you have about taking out a short-term loan, including whether you can afford it. We are financial experts who can talk you through different lending solutions, helping you make the right decision when it comes to your money.