Short term loans

What is a short-term loan?

A short-term loan is a sum of money that you borrow from a lender and repay, with interest, usually within 12 months.

Most short-term loans are unsecured. This means you don’t have to put any valuable items up as security in case you cannot meet your repayments.

Some lenders define short-term loans as borrowing repaid over one or two years, but many loans are for a few months only.

The Financial Conduct Authority defines high-cost short-term credit as unsecured lending charging interest of 100% or more with repayment within 12 months. Some of these short-term loans are referred to as payday loans.

Another type of short-term lending is pawnbroking. Pawnbrokers offer secured loans as you must leave a high-value item as security to get your cash advance. More people take out unsecured loans than borrow from pawnbrokers, but the average amount borrowed from a pawnbroker is a little higher.

How does a short-term loan work?

If you are thinking about taking out a short-term loan, the first step is to make a loan application. This may be done directly with a lender or through a credit broker.

The lender will assess your application. You will likely need to undergo a credit check before a decision is made.

If you are successful and are offered a loan, you will be provided with documentation outlining the terms and the total cost of the loan, including any interest.

Most short-term loans are paid back in instalments. Depending on the loan, this might be monthly, fortnightly or weekly.

If you are happy with the offer, you will be asked to sign a credit agreement, which is a legally binding contract between you and the lender.

When you take out a short-term loan, the lender will usually require you to set up a continuous payment authority (CPA) on your debit or credit card. This lets the lender take what you owe directly from your account on the repayment date.

It is important that you have enough money in your account to cover the payment. If the payment fails, you may be charged a late payment fee.

Some short-term loans have an APR (annual percentage rate) or more than 100%. This type of loan is officially called ‘high-cost short-term credit’ but is often known as a ‘payday loan’.

Who uses short-term loans?

Short-term loans are typically used by people with limited alternative credit options elsewhere.

This might be due to:

• a lack of credit history
• being new to the UK
• past credit problems
• having existing debts

Sometimes short-term loans are used as emergency loans when a borrower needs cash quickly.

How much can you borrow?

The maximum loan amount will depend on the loan product and lender. Some people borrow as little as £50, others may take out a loan for as much as £5000.

Figures from the Financial Conduct Authority (FCA) indicate that the average high-cost short-term loan outstanding in mid-2022 was just over £370. The same figure for pawnbroking was just over £500.

How much you can borrow will depend on your personal circumstances and the loan affordability. When deciding how much to lend you, most lenders will look at:

• your income
• your credit history
• affordability
• the reason for the loan

What is the repayment period?

Repayment periods on short-term loans can vary between different products and lenders.

Most short-term borrowing is designed to be repaid within a few months. Other lenders may allow the loan to be repaid over one or two years.

With high-cost short-term loans, you will be usually be allowed to repay your loan early without any penalty.

If you can do this, you will reduce the total cost of your loan because you will stop paying interest earlier.

Is a credit check required?

If you are taking out a loan from an FCA authorised lender, you will be required to undergo a credit check before a decision is made.

A credit check is when a company contacts a credit reference agency such as TransUnion, Experian or Equifax to look at your credit report to see your financial history.

However, they will carry out affordability checks to ensure the repayments won’t make your financial situation worse.

How long will it take to receive the money?

Some short-term lenders will approve your application and pay the money into your bank account on the same day. Some claim they can transfer funds in as little as 15 minutes.

Other lenders will take longer to send you the funds – check the timescales when you make your application.

The time it takes for the funds to reach your account may also depend on your Bank’s processing times.

Can you apply for a loan online with Moneasy?

Yes, you can apply for a loan online with Moneasy. We work with a panel of lenders that offer loans up to £5,000.

The online application process has been designed to be simple to use and can be completed from your mobile phone in just a few minutes.

Can you get short-term loans with bad credit?

If you have bad credit, you can still apply for a short-term loan. Many short-term loan providers specifically help people with lower credit scores.

A short-term loan may be easier to get than a traditional personal loan if you have a history of bad credit, but they can be more expensive than other types of personal loans. This is because they tend to have higher interest rates due to the additional lending risk.

Are short-term loans expensive?

Short-term loans are typically more expensive than standard personal loans. Borrowers can be charged a high APR and set-up fees, plus late fees if repayments are not made on time.

The Financial Conduct Authority (FCA) introduced new rules for high-cost short-term credit in January 2015. This makes some short-term loans cheaper than they used to be.

Specifically, the rules say that:

1. For all short-term loans, interest and fees must not exceed 0.8% per day of the amount borrowed.
2. Default or late payment fees need to be capped at £15.
3. There is a ‘total cost cap’ of 100% – this means borrowers will never have to pay back more in fees and interest than the amount borrowed.
4. Someone taking out a loan for 30 days and repaying on time will not pay more than £24 in fees and charges per £100 borrowed.

After these rules came into force the FCA’s research found that on average borrowers repaid 1.65 times the amount they borrowed. It claimed borrowers had saved an average of close to £200 each as a result of the price cap.

If you have been given a loan you can’t afford to repay, or your lender has charged you more than the costs outlined above, you may be able to make a complaint to the Financial Ombudsman Service (FOS).The FOS may investigate the case to decide whether or not the lender has treated you fairly and kept to the rules. This is often not a quick process.

Who provides short-term loans in the UK?

Short-term loans in the UK are offered by:

• lenders such as Drafty, Lending Stream, Cashfloat and QuidMarket
• pawnbrokers such as Cash Converters and H&T
• banks and building societies
• credit unions
• the government

The best short-term loans depend on your circumstances. For example, loans from the government will only be agreed if you are on certain benefits.

Short-term loans from a direct lender will be more expensive, but more widely available.

Do banks offer short-term finance?

Some banks offer loans repayable over one to two years. Repayment terms are unlikely to be less than a year – but some loan products will allow you to make overpayments or pay off your loan early.

Short-term finance from banks is likely to require a higher credit score than if you went to a specialist short-term lender.

As an alternative to a short-term loan, you might be able to get a credit card or overdraft from your bank.

Credit cards offer flexible repayments and can be a cheaper or more convenient option than a loan. Some offer interest-free periods of several months.

An overdraft facility lets you borrow money by spending more than you have in your current account. Some banks offer a certain amount of interest-free overdraft. Many banks, however, charge 35% to 40% for authorised overdrafts.

Overdrafts are convenient but check with your bank how much you will need to pay in interest or fees – other forms of borrowing might be cheaper.

What are the advantages of borrowing money short term?

Borrowing money over a shorter period means you can borrow exactly what you need and repay the full amount quickly.

Because of this, short-term loans can often be handy in an emergency – for example, if you need your car repaired or to buy a new washing machine.

The application process for short-term loans is normally quick and can be completed online and, if successful, money is usually transferred to your account quickly.

If you have a poor credit record, you may still get a short-term loan.

Are there any disadvantages?

Short-term loans are generally more expensive than other types of borrowing. If you don’t repay the loan on time, or you can extend the term, you’ll pay even more.

Using short-term loans regularly could result in becoming trapped in a debt spiral, leading to further financial problems.

Failing to repay your loan will also have an impact on your credit score.

Could a short-term loan help your credit rating?

Repaying a short-term loan on time can improve your credit score. An improved credit score will make it easier to borrow money in the future, and cheaper too.

Can you apply for short-term credit if you are unemployed?

You might be able to get a short-term loan if you are unemployed, but it will be more difficult than if you had a job. Lenders will want to be sure you can afford the repayments from your benefits or other income.

If you own your home, you might be able to get a secured loan if you are unemployed – but your house would be at risk of repossession if you failed to repay the loan.

Can you get a short-term loan if you are a student?

You might be able to get a short-term loan if you are a student, but you’ll need to prove you can repay it – for example, using income from a part-time job.

Some universities offer students short-term loans if their usual source of funding (such as a maintenance loan or bursary) has been delayed or the student is deemed as having an emergency.

How do you use short-term finance responsibly?

Short-term loans can be useful in emergencies and if you don’t have access to cheaper borrowing. It’s important not to borrow more than you need and to be able to afford the repayments.

Don’t start relying on short-term credit – if you are struggling financially, there is help available. In some cases, you might be eligible for government benefits or grants to help with living costs.

Debt charities such as Citizens Advice and StepChange can help you budget, manage your income and outgoings, and weigh up the pros and cons of different types of personal loan.

What happens if you cannot repay your loan?

You should contact your loan provider if you cannot afford to make repayments as agreed. You may be offered an alternative repayment plan with lower payments.

If you stop making payments, the lender is likely to charge late payment fees. It might also pass the debt to a debt collector or initiate court action, which could result in you getting a County Court Judgment (CCJ).

Missed payments will have a negative effect on your credit record and this will impact your ability to borrow money in the future.

Short-term loans | Summary

Short-term loans can be a good solution if you have an emergency such as needing to repair a household appliance or pay for travel expenses. The application process can be quick, and the money may be with you on the same day.

But taking out short-term high-cost credit should not be something you do on a regular basis. Interest charges can add up quickly and you could end up repaying much more than you originally borrowed.

If you often struggle for money, check if you are entitled to government benefits or any other financial help. For example, you may be able to reduce your household bills by signing up to ‘social tariffs’ for broadband or mobile phones aimed at low-income households. Other sources of help might be credit unions, food banks and debt charities.