Most short-term loans are for a year or less, and a borrower may have many of them in sequence or even concurrently to finance expenses. Most short-term loans are used to fund seasonal or cyclical daily costs, such as household repairs, holiday financing, family emergencies and fund other urgent financial requirements.
Increasingly, short-term financing has become a quick fix solution for individuals short on cash. Research shows that in 2017 alone, short-term loans contributed more than £23 billion to the economy. The ease of access and simplified loan processes has made them a popular loan option. However, this increase has resulted in more borrowers defaulting on monthly repayments. Not being clear about the loan terms with prior research about repayment conditions has left many borrowers in the dark about their borrowing habits. We have compiled a list of things to keep in mind before applying for a short-term loan so that you don’t fall into a debt trap.
#1 Compare your options.
There are many options available when it comes to getting a payday or instalment loan, so it’s important to compare them to find the one that best fits your needs. Look at the loan amount, features, the APR, and how quickly the loan is expected to be repaid to ensure the loan matches your needs
#2 Review the eligibility criteria.
While lenders may still accept applications if you have a bad credit history, they still have criteria that will need to be met. Check the minimum age, income and residency requirements as well as the loan amount and terms that are offered. More importantly, be sure to check whether the lender is licensed under FCA. This information is generally found on the website of the lender along with the registration number.
#3 Only apply for how much you need and can afford.
Lenders shouldn’t offer you a loan larger than they think you can afford, but you should still work out what repayments you can manage and check that it makes sense for you to accept the terms offered in your circumstances. Only apply for a loan with repayment terms that will work for you. No matter what type of loan you apply for, it is important that you budget in advance to ensure you can afford to pay it back on time.
#4 Budget to cover your repayments.
After you have been approved for a payday or instalment loan, your repayments will generally start on your next payday, so make sure your budget considers the amounts of your repayments. Just as it is easy to forget you still need to pay for a purchase you made on a credit card until you get the bill, it is easy to forget that you need to repay your short-term loan before your payments are due. If you can’t cover off your monthly needs and the loan payment, you should explore other options.
#5 Understand the downsides of fast approvals.
There is an old financial adage that all borrowers should learn by heart. Fast credit is expensive credit. There are plenty of quick short-term loan options that can get you to cash in hand within just a few days, however, they will cost you dearly. Some short-term loans with high APRs can significantly impact your total cost of borrowing.
Representative APR Example:
If you take a loan for £100 with an APR of 400%, this translates to paying back £400 over a period of one year.