Short-Term Loan Interest Rates & Terms Explained

What is the interest rate on a short-term loan?

Short-term loans are loans specially designed for short-term borrowing, usually for at least three months. They can help people who face financial emergencies and have exhausted all other options, including their savings or help from their friends and family.

The Financial Conduct Authority introduced a price cap on short-term loan interest in 2015 to protect customers from excessive charges when borrowing high-cost, short-term credit. This now means that you will never be charged more than 0.8% interest per day when you take out a short-term loan.

Ready to search for your loan?

Get Your Quote

What does APR mean?

APR stands for annual percentage rate – it’s the official rate used by lenders to help you understand the cost of borrowing money from them. It will differ between lenders, taking into consideration their interest rates and any additional charges. Every lender must tell you what their APR is before you sign a credit agreement with them. When you compare the APRs of different lenders, you are looking at which loan is the cheapest to borrow.

What is the APR on short-term loans?

If you’re considering a short-term loan, you might have noticed that its APR is a lot higher than other forms of loans or lending solutions. This is because APR is an annual rate measuring the cost of borrowing money for 12 months. Short-term loans, by their nature, are designed to be borrowed for less time.If the loan in question is longer than 12 months, the APR would be calculated by adding up the total interest and fees, then divided to create a yearly average. When the loan is less than 12 months, as is true for short-term loans, the total cost is multiplied to give an average for the year. This explains why APRs for short-term loans are usually much higher than APRs for loans that run for a full 12 months.

Your questions, answered

When looking for a short-term loan, it’s also useful to understand the difference between typical APR and representative APR. APR is calculated the same way by every lender so that you can easily compare their costs, safe in the knowledge that they’ve been calculated using a standard formula. However, different loans will be influenced by factors specific to their terms. Your personal APR may differ from the next customer due to your circumstances. The typical APR is the rate that over two-thirds of borrowers are offered, and the representative APR is the rate that 51% or more of borrowers are offered.

Most lenders will offer repeat customers lower APRs because they know they are reliable and will pay their loan back following their agreement. As a new customer, you’re likely to be offered closer to the typical APR.

Examples of situations where you might need a short-term loan include a poorly pet who needs urgent veterinary assistance, a broken boiler right before Christmas and emergency car repairs when you rely on your vehicle to get around for work. In all of these situations, not being able to afford to resolve the problem can be extremely upsetting, frustrating and stressful. This is where short-term loans can help. 

You can apply online via a simple application form and, in most cases, receive an instant decision. If approved, most short-term lenders will deposit the funds into your bank account on the same day. The fast application, approval and payment process means you can resolve your financial emergency quickly.

Some lenders are also willing to accept early repayment of loans if your circumstances change and you can pay it off earlier than agreed. This will reduce the amount you will need to pay in interest because you will have borrowed the loan for a shorter length of time.

Ultimately, the more money you borrow and the longer you borrow it for, the more money you’ll have to pay back in interest. As a general rule of thumb, the daily rate of interest reduces as the length of the loan and its size increase. So, whilst you will be paying more in interest overall, the loan will be more affordable because the repayments are spread out.

If you’re looking for a loan, search online to compare the various lenders and their APRs. Before you start the application process, double-check you are eligible to apply. The usual criteria for borrowers is:

  • 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.

When you’re ready to apply for your loan one, these are usually the steps you’ll need to complete:

  1. Confirm the amount of money you’d like to borrow and for how long you’d like to borrow it. Some lenders also like to know what you plan to use the loan for.  Short-term loans are intended for short-term borrowing so, the loan duration usually starts at three months.

  2. The online application form will ask for information about you, your employment status and whether you receive a regular income. You may be asked to provide proof of where you’ve lived for the last three years, as well as bank account information or payslips from your job. You may also be asked for a breakdown of your monthly outgoings, such as your mortgage or rent, utility bills, other bills, transport and other common expenses.

  3. Once you’ve submitted your application to the lender with all the relevant information filled in on the form, they will run a credit check on you and review the details you’ve provided. They’ll conduct affordability assessments to make sure that you can afford to make your repayments in line with the agreed schedule.

  4. You should receive a decision on your application quickly, with some lenders being able to provide one instantly. If approved, your lender will transfer the funds into your bank account electronically – often on the same day that your application has been approved.

When it comes to making your repayments, the process couldn’t be any easier. During the application process, you will agree to your lender using a continuous payment authority (CPA) to collect loan repayments. This means they can automatically take repayments from your bank on a specific date. You can request reminders to be sent by the lender before each collection date, so you’re never caught short before payment is due. Simple!

Making your repayments is crucial – if you fail to do so, you could incur further fees or charges and hurt your credit score.