When Should You Use A Short Term Loan And When Shouldn’t You?

When should you use a short-term loan, and when shouldn’t you?

Short term loans are a quick, simple solution if you’re facing a financial crisis that needs an urgent resolution. Life can be unpredictable, and sometimes situations arise that we haven’t financially prepared for. If you’ve exhausted your other options, such as savings or help from your friends and family, then a short-term loan can provide quick funds in your moment of need.

We know that short term loans often come with lots of questions. If you’re wondering how to tell if a short-term loan is affordable, whether bad credit will hold you back from being accepted for a short-term loan, or what the difference between short- and long-term loans is, we’ve got the answers to these questions and more.

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What is a short-term loan?

Short term loans provide a short-term solution. Most short-term loans are borrowed for a minimum of three months to bridge a gap in your funds. You should ask yourself whether a short-term loan is the best solution to your financial situation. Is this the most cost-effective way of covering your outgoings, or is something more long-term required? Compare the various loans out there to find something to fit your needs.

However, we can’t stress enough how important it is to remember that short term loans should only be used in emergencies when you have no other options. These loans can be expensive when borrowed over a long period as they come with high interest and certain charges.

Your questions, answered

Once you’ve assessed your situation and decided that a short-term loan is a right choice for you, you need to make sure that you fit the lender’s criteria for borrowing. Most lenders are looking for:

  • 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 don’t meet these eligibility criteria, then you shouldn’t use a short-term loan.

You should also avoid short term loans if you know that you will struggle to make the repayments. Failing to repay your loan can have drastic consequences. You may face extra fees and potentially more interest as time passes. Missing your repayments can also spiral into long-term debt, which can be extremely difficult and expensive to get out of.

Failing to repay your loan on time can also hurt your credit score. If you miss a payment, your credit file and loan data – which lenders will look at to judge future applications – will be updated as ‘overdue’. If you continue to miss your payments, your lender will mark you with a Default, which is a red flag that says you’re not creditworthy. This will stay on your credit file for six years, so you should avoid it at all costs. If you know you will struggle to repay your loan before even taking it out, you shouldn’t do so.

Make sure that you are sure that you can make the scheduled repayments on time and in full. Failing to do so runs the risk of entering long-term debt, plus you can damage your credit score and accrue additional charges from your lender. If you have any doubt about being able to afford your repayments, look for alternative financial solutions. You can also check your credit score for free online to make sure that there aren’t any red flags or indicators that you are not in the position to be borrowing money right now.

Borrowers of short-term loans usually face an emergency bill and have exhausted all their other options. We also help self-employed people and rely on certain things, like their car or laptop, to generate income. If these items were to break and not replaced, this could lead to stalling income and cash flow problems. Short term loans bridge the gap between finding a short-term solution for your financial problem and your next payslip.

Our customers use short-term loans to pay for emergencies, such as:

  • Urgent car repairs.
  • Technology replacements that can’t wait, such as laptops.
  • Unexpected veterinary or medical bills.
  • Home emergencies, such as a replacement boiler, fridge or washing machine.
  • Emergency dental treatment.
  • Replacement of tools needed for work.

APR is short for annual percentage rate, which is the official calculation used by lenders to help you understand how much it will cost to borrow from them. It differs between lenders, and every lender must tell you what their APR is before you sign their credit agreement. When comparing short term lenders, you should check their APR rates and look for the lowest ones available.

The APR is usually a lot higher on short term loans than other forms of loans or credit. This is because APR is an annual rate and measures the cost of borrowing funds over 12 months. Short term loans are intended to be borrowed for less time – usually between one and three months.

For loans that are longer than 12 months, the APR is calculated by adding up the total interest and fees and then dividing them by 12 to create a yearly average. For short term loans, when the length is less than 12 months, 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 12 months or more.

You should only use a short-term loan if you’re feeling completely confident about the process, your repayments and the implications a loan can have on your credit file. Make sure that you read the terms of the credit agreement thoroughly before you sign. It can be tempting to skim through terms and conditions when you’re in a hurry or under pressure to find funds fast, but it’s important that you fully understand the exact terms of your loan before signing anything.

You should never take out a short-term loan if you have doubts about the process or questions about the potential implications, so we urge you to speak to our knowledgeable team members today.