Understanding Short Term Lending

However, although there may be an abundance of these products in the UK, understanding which types of short term loans are best suited to your needs is an important consideration that you should always think about before applying.

Not managing your finances properly and if you miss any of your required repayments on a loan, you will badly damage your credit rating. This will mean than it will be much harder in the future to acquire any credit. The knock-on effects of not being able to take out the credit you may need in the future is that you will also struggle to repair your credit rating (through timely repayments) and may even get rejected for forms of credit such as mobile phone plans and car finance.

Popular Types of Short Term Loans

These loans come in many forms and although it may seem that there is not necessarily a specific loan for you and your particular circumstances, considering whether or not you need the loan at all is crucial.

Payday Loans – These are possibly the best known and most widely utilised for of high cost short term (HCST) finance. These are well-known and have been in and out of the news in recent times. The basic premise of a payday loan is that the borrower acquires a loan (usually between £100 and £2,000) to cover immediate costs. As soon as the loan is funded, the interest clock starts and the loan starts accruing interest. On or around their payday (from their employment), the borrower will clear the loan capital as well as the interest in full and in one single payment.

Instalment Loans – Like payday loans, these are another form of HCST loan. However, the fundamental difference is that an instalment loan is designed to be repaid in numerous instalments over a pre-agreed period of time. Whilst payday loans need to be cleared in full (capital plus interest) in a single payment, instalment loans spread the cost over a few months, usually 2 – 6. Each month the borrower repays a portion of the loan plus interest until the end of the term whereby they will have cleared the total amount owed. This makes the loan affordable and means that you can consider planning your finances properly in advance.

Logbook Loans – Unlike payday and instalment loans, logbook loans ae a secured form of short term finance. This means that not only is there an asset acting as collateral for the loan, but that there is the potential for the borrower to be able to secure a larger loan. These loans are secured against the V5 (ownership document), also known as the ‘logbook’ of the vehicle in question. Lenders of these loans will usually only lend up to a certain percentage of the vehicle’s overall value.

For example, if a vehicle is valued at £20,000, the lender may be willing to lend as much as 50% of the value (£10,000). However, should you default on one of these loans, not only will you damage your credit rating but you will also lose the vehicle.

When is Short Term Finance Useful?

Short term loans are not for everyone. However, there are times where they are more worthwhile and worth considering than others.

For example:

Unexpected Emergencies – If you find yourself struggling to cover something that needs seeing to urgently such as a broken-down car, leaky roof or a boiler on the blink in winter, a short term loan may be the solution

Debt Consolidation – It is sometimes worthwhile taking out a short term loan to pay off multiple debts; consolidating them into a single, more manageable debt

Home Improvements – Improving your home, for example adding a conservatory, not only gives you more living space and a potentially better quality of life, but may also actually improve the property’s overall value. Hence, if you are looking to sell your property, improving it beforehand may mean a very positive return on investment.