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Short-term loans

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What are short-term loans?

As the name suggests, a short-term loan is when you borrow money from a loan provider for a relatively short period of time.

This type of loan is generally meant to be repaid within 12 months, although some lenders will let you borrow for up to three years. 

You’ll agree to make monthly repayments until the whole debt – plus interest – has been repaid. The interest rate is likely to be higher than with a standard loan because lenders need to earn enough income to cover the costs of getting their money back faster.

Another reason interest can be higher is because short-term loans are usually personal loans, which are unsecured and don’t require any collateral, so pose more risk to the lender.

What is a short-term loan good for?

A short-term loan can be useful if you’re facing an unexpected expense that you’d otherwise struggle to pay for. For example, it could help with:

  • Buying or repairing a boiler
  • Car repairs
  • Paying vet’s bills
  • Getting dental work done
  • Replacing old furniture or home appliances
  • Buying a new phone or laptop for work
  • Last-minute travel arrangements for a family emergency. 

While taking out a short-term loan could be a good way to deal with an immediate issue, it isn’t normally a viable solution to longer-term financial problems.

How much can I borrow as a short-term loan?

The amount of money you could borrow depends on your financial profile and the lender’s rules. However, you may be able to borrow up to £3,000 with a short-term loan.

When you apply for a short-term loan, the provider will want to carry out an affordability check on you. This is to help them assess how likely you are to make your repayments on time based on your current finances and history of borrowing. They’ll look at things like:

  • Your income and outgoings
  • Your credit score
  • Why you’re applying for a loan.

If you’re looking to spread the cost of a loan over a year or more, you can use our loan calculator to get an idea of what your monthly repayments could look like.

Can I get a short-term loan?

To be eligible for a short-term loan, you’ll have to meet the lender’s criteria. Each is slightly different, but typically you must:

  • Be aged 18 or over
  • Be a UK resident
  • Be employed, with a regular income
  • Have an active bank account
  • Provide your address history from the past three years.

Before making a formal application, it may be useful to check your eligibility to find short-term loans you’re most likely to be accepted for. It’s a soft search and won’t affect your credit score. 

Check your eligibility

Compare the Market Limited acts as a credit broker, not a lender. To apply you must be a UK resident and aged 18 or over. Credit is subject to status and eligibility.

Are short-term loans low interest?

Compared with traditional personal loans, short-term loans tend to have considerably higher interest rates. However, an excellent credit score could give you access to cheaper interest rates than someone with a less-than-perfect rating.

Did you know?

There’s a price cap on short-term loan interest. This was introduced by the Financial Conduct Authority (FCA) to protect consumers from excessive charges when taking out high-cost short-term credit. So you’ll never be charged more than 0.8% interest a day. 

How to find the cheapest short-term loan

Even if you need a loan quickly, it’s important to see whether you can minimise the cost of borrowing. 

Compare interest rates and APRs (annual percentage rates) to get an idea of how much the loan will cost you overall. Include any fees or charges that might apply. 

Remember, the cheapest way to borrow money is by choosing the shortest loan term with monthly repayments you can comfortably afford. The longer the term, the more you’ll pay in interest overall.

Is a short-term loan the same as a payday loan?

Although a short-term loan and a payday loan are both types of short-term borrowing, they’re not the same product

Payday loans are designed to tide you over until you next get paid, and are meant to be repaid within a month. They’re also generally for smaller amounts, typically from £100 to £1,000, and come with a much higher interest rate. 

In contrast, you can take out a short-term loan for longer than a payday loan, spreading the cost over months rather than weeks. The repayment period is still shorter than a standard personal loan though, which can typically be paid back for up to five years. 

How to repay a short-term loan

Paying back a short-term loan is much the same as other loans, just over a shorter timeframe.

You’ll need to have enough money in your current account on the day your payment is due each month. You can either make the payment yourself by setting up a direct debit, or give your lender continuous payment authority. This means they can take the money from your bank account automatically until the loan is paid off.

If there isn’t enough money in your account, you’ll face late or missed payment charges – which not only add to your debt, but could also negatively affect your credit score.

What to do if you are struggling with repayments

If your debt is getting on top of you, it’s always better to be honest with your lender so they can help you find a solution. They may suggest adjusting your repayment schedule or giving you a payment holiday, which allows you to pause your monthly payments for a while.

Free guidance is also available from debt advice charities such as StepChange and National Debtline.

Or you can call the Citizens Advice debt helpline on 0800 240 4420.

Pros and cons of short-term loans

Short-term loans can be useful for a quick financial fix, but they won’t be suitable for everyone. Think very carefully about what’s right for you before jumping in and applying.

Benefits

There are a few reasons short-term loans can be a good option, if you’re sure you can pay back the money quickly or within the required period. They include:

  • Simple and convenient to apply online
  • Fast payment – you could have the money in your bank account the same day
  • No collateral needed – short-term loans aren’t secured against your home or car
  • Less time to rack up interest compared with longer loans
  • No long-term commitment.

 

Disadvantages

Short-term loans also come with certain downsides. They include:

  • Higher interest rates than longer term loans
  • Limited loan amounts – you might not be able to borrow as much as you need
  • Short repayment periods – you might have less than a year to pay back what you owe
  • Missed payments may harm your credit score
  • Potential to get into further debt if you’re already struggling financially.

 

Alternatives to short-term loans

Before you apply for a short-term loan, you might like to consider the following options to see if they’re better suited to you:

0% purchase credit cards

Unlike a short-term loan, a 0% purchase card allows you to spread the cost of a big-ticket item without paying interest. You’ll only get the interest-free offer for an introductory period though, so the idea is that you pay off the balance in full before this ends. Once it does, you’ll be moved to the lender’s more expensive standard variable rate.

0% money transfer credit cards

In contrast to a short-term loan, a 0% money transfer card lets you move money from your credit card into your current account to cover unexpected expenses. You won’t pay any interest for a set time, but this could be shorter than other 0% cards, and there’ll be a fee for the transfer.

0% overdrafts

Another alternative to a short-term loan is an interest-free arranged overdraft facility, which some banks offer. This allows you to spend more than you have in your current account. However, the amount you can borrow and for how long without paying interest varies between banks, so check the Ts and Cs.

Salary advance

You could ask your employer for an upfront payment that’s deducted from future wages. This would allow you to borrow the money you need for an urgent bill without paying interest. But you’ll need to be sure you can accommodate a salary reduction the following month.

Check out our guide on how to borrow money interest-free for more detail.

Frequently asked questions

Will a short-term loan affect my credit score?

Like any form of borrowing, a short-term loan can affect your credit score temporarily. That’s because the lender will usually run a hard credit check, which will leave a mark on your file.

But as long as you make your repayments on time and in full, your credit score should gradually improve. Missed or late repayments, on the other hand, will negatively affect your score and future chances of borrowing.

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

It’s perfectly possible to get a short-term loan with a poor credit score, but your options may be limited. If you’re looking for loans for bad credit, it’s also likely that you’ll only be able to borrow a small amount and be charged a very high rate of interest.  

Do I need a guarantor to get a short-term loan?

You don’t typically need a guarantor to get a short-term loan because it’s a type of unsecured personal loan. That said, this might be an option if you’ve been unable to get approved for a loan yourself because of bad credit.

A guarantor loan is when a family member or friend agrees to pay off the debt if you can’t. They will need to be comfortable taking on this level of responsibility though.

How quickly can I get a short-term loan?

Once you’re accepted for a short-term loan, you could have the money in your bank account within hours or even minutes depending on the lender.

The content written in this article is for information purposes only and should not be taken as financial advice. If you require support on the products discussed here, please speak to your bank/lender or seek the advice of an independent professional financial advisor. We also have more information on our Customer Support Hub.