Short term loans can be confusing and sometimes a little scary, but this guide will help you to understand what a short term loan is, why you might consider getting one and when you probably should avoid them.
What are Short Term Loans?
‘Short term loans’ is an umbrella term that covers any kind of loan that lasts less than a year. More commonly though, it refers to a payday or an instalment loan that last anywhere from 1-36 days.
Payday vs Instalment
The two types of short term loans, payday and instalment, are similar but have some key differences that make them more or less suitable to different individuals. You can also do a quick Google search to compare the two.
Both are intended to be a way to get money quickly when you suddenly have to cover a cost you couldn’t have foreseen. This could be repairing your boiler or fixing your car — things that can’t wait and need to be paid for straight away. Sites like Associates home loan are also a good way to raise finance.
Payday loans are designed to be paid back in one lump sum after your next payday. This means they usually last anywhere between 1-36 days.
Instalment loans, on the other hand, are designed to be paid back over a few different specified dates. Most often, this is monthly for three months. While usually being more expensive than a payday loan, it has the advantage of spreading repayments which can be helpful in managing your budget and being able to repay the loan.
Compared to the interest on types of long-term loans, this is expensive, but if you need money quickly and for a short period of time, then it could still be a manageable and reasonable option depending on your circumstances.
Direct Lenders vs Brokers
Short term loans can come from both direct lenders and brokers. A direct lender is, as the name suggests, someone that directly lends you money. A broker, on the other hand, is a third party that doesn’t actually lend the money to you themselves but works with lenders. For example, a price comparison website would be considered a broker as they work with multiple lenders to find you the best deal.
Why might you consider a loan?
You should only get a short term loan when you definitely need one. If you can put off doing the repair, paying for that item or buying a new pair of shoes until after your payday when you’ll be able to pay for it yourself, then you should. If it’s a luxury item, then you shouldn’t use a loan for it, but instead look at other options such as how you could alter your budget to save up.
However, if it’s an emergency repair or cost then a short term loan might be the best option. For example, you might need to repair your car which you use to get to work. Without the repair, you won’t be able to earn the money, but you know that after your next payday you’ll be able to pay it back. In this situation, you might consider a loan.
When should you not get a loan?
Loans are important to consider carefully. Getting a loan when you can’t pay it back could lead to serious financial difficulty and further problems.
You shouldn’t get a loan if you’re not sure when or how you’ll be able to pay it back. If you’re unsure, then don’t get one and instead consider what other options are available to you. The Money Advice Service, for example, could help you understand the choices you have. Not being able to repay a loan could lead to serious problems, so you should never get a loan if you’re not sure whether you can repay it.
If you want financial advice, the Money Advice Service is free and will be able to offer some help.