A short-term loan is exactly that: a small loan given and repaid over a short expanse of time, i.e. less than a year. The loan can be borrowed for up to a year but no longer, with high interest due to the brevity of the loan duration. A high-cost short-term loan is a good example of the more common short-term loan, being repaid from 3-6 months with an APR of more than 99.9%. A loan that is paid within 3 months is known as a ‘payday loan’.
Short term loans are useful in an emergency, though they are expensive, and if you fail to repay in full this can seriously affect your credit score. Always make sure to compare your options before applying for a loan, as a short-term loan can be cheaper than eating into your regular overdraft, but more expensive than some long-term loans. It’s important to know, however, that the quicker you pay back a short-term loan the less interest will be charged, and therefore you can negotiate yourself a good deal by paying back a short-term loan as quickly as possible.
A small loan can be provided by almost any platform, including a bank, supermarket, P2P, and even a guarantor lender.
What’s the catch?
When we say that a typical bank loan offers an APR of ~3%, and then compare that with the 1000% or more APR offered on a short-term loan you begin to understand why a short-term loan is not to be applied for unless in a financial emergency. Although the FCA has recently decreed that a high-cost short-term loan is now capped with regards to the interest charges, this is still set at 100% of the loaned amount, or 0.8% per day.
Can I apply?
The eligibility criteria for each short-term loan will change with the lender, so always check the individual lender’s criteria before applying. Being declined from a loan application goes on your credit file and will negatively affect your credit score.