A Guide To Short Term Loans
Traditionally, both personal and secured loans have been aimed at borrowers repaying the money over periods from 1 to 25 years, depending on loan size and affordability. However, the last few years have seen in explosion in the availability of loans with repayment periods of less than 12 months, and in many cases as little as 30 days.
We talk in some detail about the different product types available in some of our other guides which you can visit here – so in this guide I wanted to talk you through some of the key features of short term lending and some of the pitfalls to be wary of.
This is one of the areas where short term loans score highly with customers. Short term lending tends to offer the customer a fairly flexible avenue for covering short term borrowing needs. Once the lenders are happy that a loan is affordable and suitable they often give borrowers a high degree of choice and flexibility over the use of the facility.
Think about 2 of the most popular forms of short term lending – Overdrafts and Payday Loans. Often the lenders will assess a borrower’s application and work out what they agree to be affordable. However within that parameter borrowers have quite a high degree of control. Borrowers can reduce their overdraft limit, repay an existing overdraft or payday loan with a simple phone call.
Another big plus for customers in the short term lending market is that they can access funds usually within the day often within hours, subject to approval. Lenders have employed emerging technologies to change the lending beyond recognition in just a few years with borrowers being able to apply from their mobile phone, sign loan agreements online and access their lenders 24 hours a day.
The downside to such quick availability of credit is that it does not impose on the borrower time to stop and think whether the loan is really the right solution for them. So make sure you think very carefully about your need to borrow before you start the process.
The amount you can borrow using short term lenders tends to be at the lower end of the scale, usually less than a £1,000 and more commonly just a few hundred pounds, particularly for first time customers.
The features outlined above, speed & flexibility, lend themselves much more readily to smaller loan amounts. However, there is one type of short term lending that can offer significantly higher loan amounts – logbook lending.
The lender effectively secures the loan against the value of the car – so if you’re lucky enough to own a car worth £50,000 you could get a logbook loan for £25,000. Those levels aren’t common but they do happen if borrowers find they need a loan to fix a cash flow problem for just a few weeks or even days.
This is the area where short term lending tends attract most of its critics as short term loans are usually expensive.
The argument from the lenders is that in lending a relatively small amount for a short term period needs a higher interest rate to make a profit. The regulators clearly disagree and have announced proposals to introduce a rate cap for lenders in the short term high cost loans market – which will be due to come into effect in January 2015.
Another area that has attracted criticism and one that you need to research fully before you consider taking out a short term loan.
Lenders often charge borrowers fees if a loan account goes into arrears, however as short term lending tends to be for lower loan amounts the fees represent a much higher % of the original amount borrowed.
The payday lenders practice of allowing borrowers to ‘rollover’ their loan for an additional month, for a fee, has also attracted criticism and tighter regulation governing the ability of lenders to do this.
- Flexibility – short term lenders often give borrowers more control and flexibility over their accounts
- Speed – you can access funds quickly but make sure you think through your decision carefully beforehand
- Loan Size – usually less than £1,000
- Cost – interest rates tend to be higher
- Charges – watch out for charges and fees should you fail to make the due repayment(s)