Is a short term loan right for me?

• What are short term loans?
  
• How do I know if a short-term loan right for me?
  
• What can I use a short term loan for?
  
• When should I avoid a short term loan?
  
• Can I get a short term loan with a bad credit score?
  
• Can a short term loan be bad for my credit history?
  
• Always consider short term loan alternatives
  
• Are short term loans and payday loans the same?
  

What are short term loans?

A short term loan is a loan that you pay off within a short time period, generally from one to 12 months. The amount you can borrow is small in comparison to other credit forms, usually between £50 and £1,000. The loan is paid back in monthly instalments with interest. Short term loans are categorised by the Financial Conduct Authority (FCA) as high-cost short term credit (HCSTC), due to high-interest rate charges. Short term loans are unsecured, which means the loan repayments are not protected by any collateral or ‘guarantee’.

How do I know if a short term loan is right for me?

A short term loan is suitable for an unexpected cost or an emergency expense that needs to be covered quickly. You could view it as a one-off solution to pay for something you can't afford at that point. If paying back in monthly instalments (that is the loan amount, interest and other potential fees) is easier and more affordable than paying for a cost in one lump sum then this might be an option for you.

Taking out a loan, even if it is for a small amount, is a serious financial commitment. It's essential you only borrow what you need and that it's from a reputable, regulated lender. Always check that the lender is authorised by the FCA.

TIP: You can check if a financial services organisation or company is regulated and authorised to do business in the UK financial sector by looking at the FCA register. We, as well as all the providers listed on MustCompare.co.uk, are regulated and authorised by the FCA.

What can I use a short term loan for?

Short term loans should only be used to cover a financial emergency; these can include:

• Emergency car repairs, such as replacing damaged tyres
• Repairing or replacing an essential appliance, such as a broken washing machine
• Necessary home repairs, such as when your boiler breaks
• Urgent medical treatment, such as an emergency tooth repair

When should I avoid a short term loan?

Although they have a purpose, short term loans are a costly form of credit, so if you are experiencing financial difficulties, this is not an option for you. Borrowing what you cannot afford to pay back can have serious financial consequences, and excess borrowing may lead you into a cycle of debt that is difficult to exit or control. Overdue bills and late payments will leave a mark on your credit report for up to six years, and this may make it difficult for you to obtain credit in the future.

NOTE: Never borrow money if you think that you will struggle to keep up with repayments. That means you need to have a full understanding of the loan terms and know what you will need to pay back each month.

Another thing to look at is the total repayment. Seeing the full amount that you will pay back with interest may surprise you, and it might be an expense you are not willing to take on. Never be tempted to borrow more than you need or to spend the money on unnecessary things.

What should I not use a short term loan for?

Don't take out a loan for frivolous spending - this can include:

• Unnecessary luxuries, such as holidays or expensive overseas trips
• Nights out
• Unessential shopping, such as buying the latest fashion accessories
• Expensive habits and addictions, such as gambling

Short term loans should not be used as a rolling form of credit. Relying regularly on high-cost credit can get you into a debt cycle of money problems that are difficult to break out of and cause you even more financial stress.

How do I know if I am eligible?

Another factor to consider is eligibility. This will vary between short term loan direct lenders; you should check on the lender’s website before applying. Generally, you should not apply if:

• You are not 18 years of age or over
• You are not a UK resident
• You are not earning a regular monthly income
• You cannot afford to make the required monthly payments
• You have any overdue bills or outstanding debt
• You have a bad credit score, or you were recently rejected for a short term loan due to bad credit

You will also likely need a valid bank account and debit card to apply. Before approving an application, a lender will likely perform affordability and credit checks. This is because a reputable, regulated short term loan direct lender will want to ensure all their customers can meet the monthly repayments before lending money. A responsible lender will not approve a loan they feel would cause financial difficulties.

Can I get a short term loan with a bad credit score?

Yes, and you may find numerous short term loan lenders for bad credit online. They may lend to you even if you have a relatively bad credit score. However, this does not mean they won't perform credit checks at all. In fact, it is likely that a regulated lender who provides short term loan will credit check you. As mentioned before, a reputable lender will want to lend responsibly and make sure repayments are realistic for your circumstances by performing affordability checks.

Before lending to you, your credit score and credit report history, whether good or bad, will likely be taken into consideration. Short term lenders will be looking for any late repayments, or overdue bills, or any signs that you are struggling financially. They will look at other factors too, including your earnings and monthly expenses, as well as existing financial commitments, such as loan repayments and credit card bills. These and other factors will serve to confirm that you can realistically afford the loan repayments and that lending money to you won't harm you financially.

Can a short term loan be bad for my credit history?

All forms of credit in your name can affect your credit rating; these include credit cards, overdrafts, loans (including short term loans) and more. Your credit score can be adversely affected significantly by late repayments. So you should only apply for a short term loan or any other form of credit if you know you can make the repayments. However, the opposite is also true; making full repayments on time, whether it's your credit card bill, phone bills or loans, will have a positive impact on your credit rating and score. For more information on how to improve your credit score, see Improve Your Credit Score: 10 Simple Steps.

Always consider short term loan alternatives

Even if you are eligible and can easily afford repayments, short term loans have a high Annual Percentage Rate or APR (to find out more see "What APR Means For You"). So you should consider alternatives and see if these are available to you. Other options can include:

• Bank overdrafts
• Personal loans or bank loans
• Credit cards 
• Credit Unions
• Credit builder credit cards
• Borrowing from a friend or family
• Government financial support

You can find out more about these alternatives in our guide: "What are the best payday loan alternatives?".

Are short term loans and payday loans the same?

Both have high rates of interest. Payday loans are typically paid back once, in full and on pay-day, hence the name. Short term loans are paid in monthly instalments, between one to 12 months. In reality, a payday loan is a type of short term loan and both fall under the FCA's HCSTC category.

Summary

Short term loans can be beneficial to cover unexpected costs fast; they are usually quicker to apply for than most other loan types. But they literally come at a cost as they have a high APR and not making repayments can be financially detrimental. Whether a short term loan is best for you or not will depend on your circumstances. However, you should only consider applying for a short term loan if:

• You understand the terms, and you know you can comfortably afford the repayments; and
• You do not have a cheaper alternative; and
• You are going to use the money as a one-off to cover an emergency cost; and
• You are only borrowing what you need; and
• The lender is regulated and authorised by the FCA.

To find out more or compare short term loans visit the MustCompare Short Term Loans Comparison Page.