A short term loan is, typically, one that is designed to provide a solution to temporary cash flow problems. It allows emergency or luxury purchases to be made at times when funds are not otherwise available. Unlike general or standard personal loans (typically for amounts of £1,000 or more and repayable over terms of at least 12 months), short term loans are usually available for smaller amounts of up to £750, or so. This is typical, although any amount up to £25,000 may be possible, depending on your credit history and is repayable over a maximum term of 12 months, or a much shorter period. A shorter repayment period does unfortunately come at a premium in terms of the interest rates available. Interest may be accrued monthly, rather than annually, increasing the cost of a short term loan still further.
Short Term Loan Features, Benefits, & Considerations
The aftermath of the credit crunch has caused a shortage of cash for banks, buildings societies, and other financial institutions. They are less willing to lend money, employ more stringent eligibility criteria, and charge more for the privilege of borrowing. Recent cuts in the Bank of England Base Rate from 4.5% to 2% in just two months, are an effort to restore a normal volume of lending and may result in the reappearance of more competitive short term loans in time. For the time being, the interest rates for a short term loan is likely to be somewhere between 5% and 12%, but because the term of the loan is short, this is of less consequence than for a longer term loan.
The APR, or "Annual Percentage Rate" of a short term loan, or the "true" cost of borrowing over a year including any fees and charges, is however still important when comparing loan products. A so-called "payday" loan, for example, is a type of short term loan. Typically, it is for a relatively small amount of money, perhaps a few hundred pounds or less, which is repaid after 2, 3, or 4 weeks when a borrower receives his or her next wage or salary payment. The danger of this type of loan, which can be sorely tempting as domestic finance becomes more and more difficult in the lead up to Christmas, is the APR. It tends to be exorbitant, at 1,000%, or more. This may not in itself be a problem if the loan is repaid in full and on time. It does, however, become a problem if some, or all, of the debt is "rolled over" into the next month, which is a common practice and it becomes easy for a small initial debt to spiral out of control. This is precisely the reason that the OFT ("Office of Fair Trading") is investigating payday loans, following concerns expressed by debt charities.
Short term loans are available from reputable lenders on the high street and on the internet, but flexibility is or at least should be, the key to an effective short term loan deal. A standard personal loan is designed to be repaid by fixed monthly repayments over a fixed period. If you wish to repay the outstanding balance, in full, before the end of that period you are usually liable for a fee known as a "redemption penalty". Some short terms loans allow a degree of flexibility in this respect and you can repay the loan at any time without penalty. You can expect to pay a higher rate of interest, overall, for this privilege, but if there is a distinct possibility of additional funds becoming available in the not-too-distant future, the interest rate can be offset by not having to pay a penalty. This can be as much as two months' interest on the outstanding balance when you finally pay off the loan.
If your credit rating is below average, information that can be obtained by applying for a copy of your credit history report from one of the credit reference agencies, such as Experian, or Equifax, then take care with the number of apparently cheap short term loans for which you apply. The headline APR is often what is known as the "typical" APR, that is, the APR for which 66% of applicants are eligible, but if you are in the bottom 33%, your application may be rejected (adversely affecting your credit rating) or you may be offered a loan at a significantly higher interest rate