How to compare short term loans

Short term loans, or payday loans, can be an expensive option due to their high-interest rates. So before you apply, you should look for cheaper alternatives and consider not using this option continuously. Plus, you want to be somewhat cautious as the industry does have a bad reputation. If you have no other option and have a one-off emergency to cover, how do you find the best short term loan from a reputable UK lender?

Before you consider a short term loan

How to compare short term loans

• The loan amount and term
• The APR and the Representative APR
• The monthly payments and total payment

How do I find a trustworthy UK short term lender?

Before you consider a short term loan

First, as with any financial services product, before you apply, make sure that a short term loan is right for you and your current financial situation. A short term loan or payday loan may seem to be a quick and easy way to get money, but convenience alone does not mean this form of borrowing money is suitable to your needs. 

There is a danger that the convenience of short term loans and the relatively quick application process could tempt you to borrow more than once or from several different lenders, resulting in costs that get out of control. High-cost short term loans should only be used as a one-off to meet the needs of an unexpected expense or emergency.

As with all types of credit, not making your loan repayments on time can affect your credit history and credit score. Remember, short term loans have high-interest rates. So, if you are experiencing financial difficulties, you don’t want to be using this option. You should be confident you can make the repayments on time before applying. You may also want to consider the alternatives to payday loans if available to you, such as a credit card or a bank overdraft.

IMPORTANT: A short term loan may seem to be a quick and easy way to get money, but convenience alone does not mean this type of borrowing is suitable for your needs. Always check for cheaper, suitable alternatives, and before applying, make sure you can afford the monthly payments.

How do I compare short term loans?

Most direct lenders are online, so the easiest place is to search online. Or you may find it convenient to compare short term loans using a loan comparison site, like MustCompare.co.uk. If you are confident that a short term loan is what you need, be sure to check:

1. The loan amount and term
2. The APR and the Representative APR
3. The monthly payments and total payment

1. The loan amount and term 

The loan amount is what you need to borrow - but only borrow what you need, not more. Remember, you pay interest on the amount you borrow, so the less you borrow, the less you’ll have to repay in interest. The term is the time in which you will have to pay back what you have borrowed.

Some direct lenders may offer you various term options which may be worth considering, be sure to give yourself enough time to pay back what you borrow. On the other hand, the shorter the period, the less you will have to pay back in interest as a total. 

TIP: When making comparisons, it’s important to compare on a like for like basis, so be sure to use the same amount and term when comparing lenders.

2. The APR and the Representative APR

Once you have established what you need to borrow and how long, check the lenders’ APR. All lenders are legally required to show APR. APR is the cost to borrow money over a year. Costs include the interest rates and any additional fees that you will pay over a year. It is always shown as a percentage to make it easier to compare lenders. 

You may also notice lenders show Representative APR (RAPR). This is another way for you to compare lenders and their products. It is an advertised rate to show the cost to borrow money over a year which applies to 51% of customers who have previously taken out the product, hence the word representative. Not all customers will get this rate, so the rate you are given may or may not be the same as the advertised Representative APR.

It’s worth bearing in mind, though, that not all loans are paid back in a year; some are paid back in a few months, or even in one month, such as payday loans. Many short term loans have APRs that go into several hundred per cent or even over 1,000%; this is because their high-interest rate is multiplied several times over to reach an annual equivalent. 

An APR calculation can cause confusion, particularly if you are looking at paying back a loan in one month or a few months (as opposed to one or two years, for example). If this is the case, along with the lenders’ APR, you may want to look at other factors, such as the total amount you’ll be repaying and the monthly payments. 

3. The monthly payments and total payment

If you don’t compare the total amount you could repay, you could end up with a more expensive loan overall. Related to this, you should also look at what you will pay back every month for the term; these monthly payments are often referred to as loan instalments. 

Most lenders will have a loan calculator function on their home page, where you can put in the amount and the length of time you want to see the monthly repayments or instalments. Always check that the monthly repayments are realistic for your circumstances before proceeding with a lender.

TIP: Use the loan calculator at the top of our short term loans comparison page to help you compare costs and monthly instalments. Once you have entered what you need to borrow and how long, press the update button to show results. The results will be based on the details that you entered.

How do I find a trustworthy UK short term lender?

Short term lenders, especially payday lenders, have a bad reputation in the UK (see “Why have payday loans got such a dodgy reputation?” in the article Shining a spotlight on short term loan. Particularly in the past, some lenders acted irresponsibly and lent to customers who would not have the means of paying back the monthly instalments. Some customers ended up in a worse financial situation as a result. There were no real control or caps on charges, and many lenders used questionable collection methods. 

Then FCA stepped in and made significant changes to the industry. So what should you look for in a UK direct lender?

1. Make sure the lender is authorised and regulated by the FCA. You can search UK Financial Services companies on the FCA register. 
2. Check you have all the information you need, especially the total you will payand that the information is clear to you. Do not proceed if you are uncertain or if you have any doubts. Instead, ask for more information so you can make an informed decision. All lenders on MustCompare are regulated by the FCA. 
3. Make sure the lender is transparent about its application requirements and that you meet their criteria before applying. 
4. Check they are a responsible lender. A responsible lender will perform all necessary checks, such as affordability and credit checks, to make sure they are lending to you responsibly. A responsible lender won’t want to put its customers in a worse financial position.
5. Check if the provider is a direct lender or a broker. A broker will take your details and find you a lender based on the information you provide. A word of caution though, a broker should not charge you a fee to refer you to a lender. A direct lender will lender directly to you, and you will deal directly with them; there is no middle man.

Summary

Always make sure a short term loan is right for your circumstances; even if you need money quickly, there may be cheaper alternatives. If you are experiencing financial difficulties, likely, borrowing more will only worsen your financial situation. When comparing short term borrowing options, first know exactly how much you really need, the length of time to pay back and what you can realistically afford. Be sure to check the Representative APR as well as the monthly payments and total amount repayable when comparing lenders. 

When looking for a trustworthy, legit short term lender, make sure they are authorised and regulated by the FCA. Before you apply with any direct lender, make sure that they are a responsible lender. Also, ensure you meet the required criteria, have all the information you need, and clearly understand it.