A short term loan is a brief, unsecured method of borrowing, that can usually be set up very quickly. Such a loan could be used to help individuals manage unforeseen circumstances such as a financial emergency, or perhaps a rush of bills landing shortly before payday
As with most borrowing solutions, short-term loans are expected to be repaid within a specific period of time - usually a minimum term of at least sixty days. By the time your agreed term is over, you will have been expected to pay back the original amount you borrowed, including the interest that was accrued in that time.
Short-term loans are not suitable for everyone and they are not the answer for people in serious debt due to the high interest rates. With some lenders the loan, once approved, can reach a person's bank account instantly.
Unsecured means that the loan is only supported by the borrower's creditworthiness - ie, their credit rating. For contrast, a secured loan uses an asset such as the borrower's home as collateral. Borrowers must usually have good credit ratings to be accepted for unsecured loans.
Can I make a short term loan work for me?
Individuals can make a short term loan work for their needs, so long as they carefully research the product and associated costs and put a plan in place for repayments. Most people start by searching for a short term loan that offers relatively reasonable interest rates and set up a payment schedule as per the agreement.
YWhen borrowing money, it's worth considering your circumstances as carefully as possible so that you can ensure you choose the form of credit most beneficial to you. For instance, aside from shortterm loans, you might also consider the flexibility of alternative methods, such as credit cards. Using your credit card to make an emergency purchase if you are not over your current limit can be an even faster solution. It can be easier to simply pay back money borrowed through a credit card, and allows more choice to pay back a loan faster or slower. However, it is important to remember that you shouldn't use your credit card as a way of spending beyond your means.
Unsecured short term loans aren't necessarily the best solution for everyone.
Firstly, you will probably need a good credit rating to be accepted in the first place. In order for such a borrowing opportunity to be applicable to your circumstances, you will need to consider whether you have the capacity to pay the money you borrow back in the correct space of time.
Lenders will also consider the fact that failing to pay back a short term loan on time can have a serious impact on your credit score, meaning that you struggle to apply for a credit card, mortgage, or mobile phone account in the future. With that in mind, it's important to be cautious and realistic with your decision. However, if you know that you will have the money to pay back the loan and you have an urgent need, a short term loan may well be the right choice for you.
Costs for short term loans vary. We cannot emphasise enough the importance of doing your research and finding a product that is suitable for you! Make sure that you feel in control of the decision you make and you do not allow a company to talk you into a product you're not comfortable with. That also applies to lead generators - firms representing the lenders.
In accordance with Consumer Credit (Early Settlement) Regulations 2004, you can repay your loan early. Lenders can charge up to 58 day's interest on early settlement but many only charge you interest for the period borrowed. Make sure you check a lenders Early Settlement Policy before you take out a short-term loan.
Short Term Loans may use a Continuous Payment Authority (CPA), which permits lenders to take your repayments, usually via a debit card, from your bank account. Alternatively, it may be via a direct debit arrangement. You should research and be clear on the method of your repayments, dates and amounts before you agree to a short term loan.
Though your primary aim should be to ensure that you make your monthly repayments on time, it is worth learning what will happen if you were to make a late payment, perhaps before you apply. You will also need to find out when the lender will attempt to retrieve payment again after you default (miss the original payment). The penalties for late repayments on this type of finance can be very high so do everything you can to avoid this eventuality.
Nowadays these terms overlap. Traditionally, the term 'payday loan' applied to loans that were designed to be paid back when the borrower was next paid by their employer – which meant they generally had a maximum term of one month. Short term loans can cover borrowing from one to twelve months.
Any lender or broker that is not authorised by the Financial Conduct Authority is known as an unauthorised lender. Any company, business or person operating as a lender without the correct authorisation is acting illegally, while any person borrowing from such a source should know that they will not be covered by the Financial Ombudsman Service or Financial Services Compensation Scheme if things turn awry.
Unauthorised lenders generally tend to target people who are more vulnerable. They may use tactics such as cold calls and spam emails to elicit business or demand repayment, and may ask for application fees or upfront payments.
The Financial Conduct Authority lists authorised companies, persons, or products in its Financial Services Register. Know Your Money does not feature unauthorised lenders in its pages.
There are many reasons why an application for credit could be declined. Not all lenders use the same criteria when assessing an application for a loan, so it is possible that although you have been declined by one lender you may be approved by another.
However, you should think very carefully before making multiple loan applications. Most lenders will perform a credit search with a credit reference agency before declining your loan. Each search will be recorded, and multiple credit searches can have a negative affect on your credit score which will impact your ability to get credit in the future.
Understanding your credit profile can help you identify why you might have been refused credit. Usually, your first credit report and score is free, but you may then pay for subsequent checks. There are 3 main credit reference agencies used by lenders. Experian, Equifax and Transunion. When you apply for credit, lenders will normally apply to one, two, or all three of them.
Free and impartial money advice is available at the Money Advice Service and Citizens Advice. These links will take you to their pages, which can help you understand more about how lenders decide whether to give you credit and what to do next.
Carefully consider if whether credit is the right thing for you. Late repayment can cause serious money problems. For help, go to moneyadviceservice.org.uk.
The Financial Ombudsman Service publishes data about the number of complaints that it has received about companies that exceed a specific threshold. You might also be able to check reviews and ratings of potential companies that you may borrow from, in other professional consumer groups and social communities.
Regardless of whether you choose to pursue an unsecured short term loan or not, it's important to remember that if you are experiencing financial difficulties, there are a number of charitable and government-based services available that can provide advice and support.
These organisations can be particularly useful in helping you to identify the best financial solutions to your existing problems, from directing you towards methods of consolidating your debt, to helping you find tools that will allow you to manage your money more efficiently. You can find the Government's money advice service for guidance on debt-related issues here, or try free debt charities such as StepChange, Citizens Advice Bureau and the National Debtline.
A loan or credit company has a responsibility to act in a customer's best interests, by ensuring that any money that is lent to them is done so on the proviso that they understand its details and how it will be paid back.
One of the FCA's top priorities is the managing of affordability in the UK credit industry. Thorough checks should be conducted prior to the loan/credit being agreed, so that the lender can be confident that customers are suitable borrowers for a given financial product.
Responsible lending also implies a full assessment the effect a financial arrangement would have on a customer, and supporting the customer if they fall into financial difficulties when paying back the money.
If you believe that a short term loan is the best solution for your current situation, then you may find that it's helpful to have access to some of the industry responsible for regulating this type of borrowing. Useful websites include:
The Financial Conduct Authority: The FCA, or Financial Conduct Authority, is the industry regulator responsible for enforcing and promoting fair practice in the lending sector. Since overtaking the regulation of the consumer credit industry in April 2014, the FCA has introduced tougher rules for lending and its promotion, and delivered greater protection to borrowers.
As short term loans are regulated by the FCA, if you feel you have to complain and it has not been resolved to your satisfaction you might wish to refer your complaint to an Independent Resolution Service (known as ADR or Alternative Dispute Resolution). Full information can be found at The Financial Ombudsman Service (FOS), to be supported by Financial Services Compensation Services (FSCS)
The Good Practice Customer Charter is for customers who have taken out a short term loan with a lender who is a member of any of the four main credit trade associations. It aims to give clarity and guidance to all parties involved, and extends more consumer rights than those provided by law. Details can be found at the Consumer Credit Trade Association (CCTA).