A guide to short term loans
As many people will know, it is particularly difficult to take out a personal loan if you are only looking to do so for a short amount of time. People often search for this type of a loan when they simply need a small amount of cash to keep them going until their next pay cheque. However most banks and building societies love to get their customers to commit to long loan terms, which can often last for years because of the amount of interest that they can receive from it in that time period. This means that most of the offers that you will see on the market for short term loans will be extremely poor value for money and if you're not careful, they will end up leaving you in a worse position than you were when you started.
There is, however, some good news when it comes to your search for affordable short term loans. In this guide, we will explain some of the best tips and tricks to finding a short term loan that suits your needs and that will help you to find one that doesn't commit to you the risk of sizeable levels of interest over the course of the loan term. One thing that we can recommend straight off the bat is that you should treat loans just like you would any other product that you are shopping for. Just with any marketplace, there are a huge range of different products out there. Some of these products are better than others and some of them will be a much better fit for your own personal needs. This means that it is important that you look around on the market a bit before your decide on any one product in particular. One of the best ways to do this is to head to a price comparison site.
Price comparison sites allow you to search for and compare a huge variety of different loans in a very short space of time. This means that you don't have to spend hours upon hours of your day researching each individual product that the various banks and building societies have on offer. Here at Money Expert we offer a free and impartial price comparison tool that delivers you quick and helpful results that you can tailor to your own specific requirements. Have a look at it today to see if it can help you save money on your next loan.
In This Guide:
- Picking the correct method
- Option 1: Credit cards
- Option 2: Get an interest-free overdraft
- Option 3: Flexible loans
Picking the correct method
Before you rush out and find yourself a loan you should think about which form of credit will suit you best. Many people often assume that getting a short term cash loan is the only way that you can get yourself some affordable credit, this is not the case. In fact there are many ways in which you can get yourself a good level of credit without ever having to take out a loan. Not all of these will necessarily be appropriate for everyone but they are certainly worth considering before you commit yourself to a pricey loan.
The first thing you should do, before anything else, is ask yourself how much money you need to borrow. This is an important question for many reasons. The first reason is rather obvious- you need to be realistic with yourself about what exactly you want the money for. You don't want to take out a short term loan just to realise that you actually need more money than you originally thought. On the flipside of this, you don't want to take out a loan that is unnecessarily big because you will then find yourself in the position where you are paying to borrow money that you actually didn't need in the first place.
The next thing you should be thinking about is whether or not you actually need to borrow cash. What this means is that you should consider whether or not you think that you could be fulfilling the same objective through another form of credit. For example, are you buying a product of some sort? If so, you should consider whether or not you could potentially buy that item on a credit card. If this is the case then you immediately open up a few different routes that you could be taking. Getting a cash loan is not always the right choice so think long and hard about whether or not it is completely necessary before you do it. You will often find that cash loans are actually the most expensive forms of credit and therefore are often not the most advisable route to take. You should make sure that you check with whichever business you are aiming at purchasing something, to see whether or not they take credit cards. It is often the case that car dealerships will not accept credit cards but other purchases for things such as furniture, will allow you to do so.
The final thing that you should think about before you take out any form of credit, is how long you think that you will need to borrow the money for. In this situation it is extremely important to be realistic with yourself. Don't underestimate how long it will take you to pay back what you owe as this can lead to large amounts of interest being charged if you take longer than you previously agreed. Typically speaking, short term loans are meant to be under a year or even less but sometimes a case can be made for going a little over this period of time.
Once you have worked out your answers to each of these three considerations, it is time to decide which form of credit is right for you. Read on to examine your different options and to find out how to go about to secure the type of credit that is right for you.
Option 1: Credit cards
One of the best ways to secure yourself a good amount of credit is by getting yourself a decent credit card. The best type of credit card to get is one with an introductory offer of 0% interest on all purchases. Surprisingly enough, these offers are actually incredibly common and you will be able to find more than a few banks and building societies that will be happy to let you get started on one of these cards- if you have a decent enough credit history that is.
Have a look at the checklist below to set if these cards fit the criteria of what you need and your own financial situation:
Who can get this type of credit?
This form of credit card will typically only be offered to people who have good credit scores, this means that you have had to have had a good history when it comes to borrowing money and making the repayments on time. If this isn't the case, then it may be unlikely that your application for this form of credit will be accepted. You should be aware of the fact that any rejected applications for credit have a negative effect on your credit rating. This means that you shouldn't apply for credit cards or loans unless you are fairly certain that you will be able to be accepted by them. Most credit-based products have a list of criteria that you can look at before you apply. It is important that you have a look at this first so that you can avoid being penalised for rejection. This will then make it harder for you to take out other forms of credit in the future and can often turn into a bit of a vicious cycle.
If you are having trouble getting credit because of a poor or short credit history, you should look into getting what is known as a credit building card. These cards are specifically designed to help people build up their credit rating and can be a really useful tool to commit to using. The way they work is by allowing you to spend small amounts of money on the card each month and then pay it back at the end with minimal interest. This can be a very good idea if you have a fixed income each month. If this is the case and you are the type of person who will be able to spend within your means, then it can often be a good idea to get yourself one of these cards.
How much does it cost?
The amount of interest that you will have to pay on a credit card can vary greatly from card to card, and it is extremely important that you look into the terms and conditions before you commit yourself to any product of this kind. Having said that, it is highly recommended that you look for one of the many credit cards out there that allow you to borrow money for an introductory period of 0%. These cards are more common than many people imagine and are extremely helpful if you are approved for one. The 0% rate of interest does not last forever but if you make sure you plan your repayments out properly, you can often have paid the whole thing back before the interest actually kicks in.
How long does it last?
At the time of writing this article, there were credit cards on the market that offered as much as 27 months with 0% interest. This means that you can borrow money for over two years absolutely free!
What's the maximum you can borrow?
The maximum amount that you can borrow will vary from person to person. Normally the bank or building society will determine your borrowing limit by taking several things into consideration. The most important factor in their final decision will most likely be your current credit rating. This means that the better your record at meeting your past loan repayments, the more likely it is that you will be able to borrow more money. The maximum amount that you are allowed to spend on your credit card is known as your credit limit. As we have said, this varies from person to person but generally speaking your credit limit should be somewhere in the vicinity of £5,000.
How can I get this credit?
The first thing you should do, if you have decided that you want to apply for this type of credit card, is have a look at the criteria that you need to meet in order to be accepted for it. Only once you have done this, should you consider applying. As we have said, being rejected for a credit card or loan will have a negative effect on your credit rating and therefore should only be done when you have a reasonable level of confidence that you will be successful in your attempts. Another thing that you should definitely avoid doing is applying for too many different types of credit card all at once. This too will have a negative effect on your credit rating and will make it harder for you to take out other forms of credit in the future. When you do apply for a credit card, you should make sure that it is offering a 0% rate of interest for an introductory period. It is also extremely important that you ensure that this 0% interest is offered on new purchases and not just on balance transfers- otherwise you could end up having to pay much more to borrow money than you initially thought.
Once you have been accepted onto a credit card that meets the above criteria, your bank or building society will set you a credit limit- unfortunately there is no way of knowing exactly what your credit limit will be before you apply, although you may be able to get a rough idea. If you are given a credit limit that is too low for you to be able to achieve exactly what you wanted to with the money, there is no reason why you can't go out and apply for another similar card to use alongside your present one. However, you should make sure that you don't apply for too many as this will have a negative impact on your credit rating and may make it harder for you to take out other loans or credit in the future.
Once you have received your credit limit and you have your new credit card, all you need to do is start spending and making the necessary purchases on the card. It is important that you make all of your repayments by the end of the 0% introductory interest period, otherwise you will end up being charged a lot more than you would have been before. It is important to note that most of these credit cards have a minimum monthly repayment figure of 2% of the total outstanding balance on the card. It is important that you at least make these repayments but it is also crucial to remember that you should be paying back more than this if you want to clear all of you debt before the introductory period is over. If you are coming towards the end of your introductory period and you think that is unlikely that you will pay off the outstanding balance before the 0% rate is raised, then you should start looking around for a cheap balance transfer credit card. These cards allow you to move your money across to them at not too great a cost and will almost certainly be cheaper than your current card will be once the introductory offer is over. Most of the credit cards which offer 0% interest for long introductory periods will boost the interest up a lot after this time finishes. Many cards will hike the interest rates up to about 15 or 20% once the free term is over. This is why it is important to get onto a different card before this happens.
Option 2: Get an interest-free overdraft
Another way in which you can secure yourself a good level of credit for not much money, is by getting a bank account which offers you a free overdraft. Overdrafts are generally offered by most banks and building societies but not all of them are very- in fact a lot of them can be very expensive indeed. This means that it is hugely important that you check the terms and conditions of your overdraft first, before you jump right in there and commit to using one.
Who can get this type of credit?
This type of credit is generally easier to be approved for than the majority of credit cards but that doesn't mean that you will necessarily be able to get it. You will need to make sure that your credit rating isn't too bad but again this is not as much of an issue as it is with the majority of credit cards. If you are student, then you should look into the student accounts that are available on the market because there are many of them that offer you a free overdraft for longer than you will be able to find when you finish with your studies and have to find a regular overdraft account. However, as with most forms of credit you will be forced to pay more money in interest if you don't make sure that you can clear your outstanding balance by the time that the offer expires.
How much does it cost?
If you manage to find yourself an account that offers you an interest free overdraft then it means that you will be able to borrow up to the maximum amount, absolutely free. This means that these overdrafts are often much better value for money than the majority of short term loans that are available on the market. However, as we have said, it is important that you make sure that you stay up to date with how much money you owe and make sure that you plan out your finances so that you can repay the amount in full before the interest free period is over. Some current accounts that offer interest free overdrafts can then charge up to as much as 50p per day once the introductory offer has expired. It is important to note that this is often regardless of how much of the balance is left over. In other words, even if you are only £1 overdrawn, you can still be charged somewhere in the region of 50p- that is an absolutely staggering 50% rate of interest!
How long does it last?
As with many forms of credit, the amount of time that you can borrow the money for will vary from person to person and from account to account. However, generally speaking you should expect to be able to use an overdraft interest free for about 12 months after you open the account. This means that these overdrafts can be a little bit shorter than credit cards in terms of the amount of time in which you can borrow the money for. This also means that you have less time in which to pay the money back once you have made the purchases. Another major difference between these types of overdraft and credit cards is the fact that overdrafts do not normally have a minimum monthly repayment in the way that credit cards do. Some people like this as a set up because it means that you have more flexibility to be able to pay back money whenever you can afford to. However, the downside of this approach is the fact that you need to be the type of person who can comfortably stay on top of their money. If you don't do this with interest free overdrafts, before you know it you could end up with two months left of the interest free period with a huge amount still left to pay off.
What's the maximum that you can borrow?
This is a question that can be fairly difficult to answer when it comes to interest free overdrafts. The reason for this is the fact that the interest free overdraft that you get will not necessarily be the same as everyone else who applies for the same account. As with credit cards your limit will depend on your specific application and your bank or building society will look at your credit score in order to decide what they feel that you will be able to pay back. If you have a good, long record of borrowing and repaying money on time and in full then you will probably get a barger overdraft interest free than somebody who does not. Conversely, if you have a credit history that shows that you have previously struggled with paying your repayments back on time, then it is unlikely that you will be given too large of an overdraft. It is also important to remember that you will also be given a lower credit limit if you haven't got a history of borrowing money at all. Whilst this may seem a little bit unfair, banks and building societies do this because they need to be certain that they think that you will be able to pay them back the money that they lend you. If you have no previous experience with borrowing and repaying money, they will most likely see you as more of a risk than somebody who has had previous experience. This higher risk assessment will then be reflected in the offer that they make you.
How can I get this credit?
Getting this form of credit is a bit easier than getting a credit card but still requires a little bit of thought. The first thing that you should do is search around for banks or building societies that offer interest free overdrafts to new customers. When you do this you should look into how much they will charge you if you were to still be overdrawn at the end of the introductory period. This is important because if anything goes wrong or your repayment doesn't go to plan then this is the amount that you will then be charged. The next thing that you should consider is how long they are willing to offer your an interest free overdraft for. Unlike with other forms of credit, such as personal loans, interest free overdrafts are better when they are longer. This is because the longer that the bank or building society is willing to lend you the money for without interest, the longer that you have to pay the money back. The final thing that you should try and find out before you apply for one of these accounts is how much they are willing to let you have as your overdraft limit. Now, as we have said, they may not be able to give you an exact amount until you have formally applied for the card but you should be able to get a rough idea of what the limit will be by looking online or calling into a branch to ask.
The next thing that you should do after finding the account that you wish to open is to formally apply to open it. This should be relatively straightforward to do. You can either go into a branch or, with some banks and building societies, you may even be able to do the entire thing online from home. Once you have applied for the account to be opened, the chances are that you will be accepted for at least the current account itself. After this, you will probably find out what limit you are going to be set for your overdraft, there will be some room to negotiate on this figure but normally not much. However, if when you are given your overdraft limit you find that it is too low, then you can still think about getting another account with a similar setup and using them both at the same time. At the time of writing this article, Nationwide are currently offering a current account called the Nationwide FlexDirect, which allows new customers to access an interest free overdraft for the first 12 months of the account. Be aware though, the account will charge you 50p per day for every day that you remain overdrawn beyond the introductory 12 month period.
Option 3: Flexible loans
One of the options for taking out credit, that many people often do not consider, is to look into taking out credit in the form of what is referred to as a flexible loan. Flexible loans work in much the same way as standard personal loans but allow you a little bit more wiggle-room when it comes to making your repayments. Unlike with a standard personal loan, flexible personal loans allow you to change the size of your repayments when you need to. What this means is that you are allowed to pay back more than the specified monthly repayment sum, whenever you'd like to and doing this will not incur a penalty of any kind. This can be extremely helpful for people who need to borrow more credit than it is possible to take out on a card or an overdraft, but who don't want to get tied into a rigid long-term repayment plan by their bank or building society.
Who can get this type of credit?
This form of credit is a little bit harder to get than the previous two that we have discussed in this guide. The main reason that it is harder to be accepted for one of these flexible loans, by a bank or building society, is that these loans are typically for much larger sums of money than you would ever be able to borrow on a credit card or with an overdraft. The basic criteria for getting a loan like this is basically the same though- you need to have a decent credit rating and also proof of a steady income. These loans are also, typically, more expensive than the other forms of credit that we have discussed thus far in this guide. This means that you need to make sure that you are confident of being able to make your repayments before you jump in and take out one of these loans.
How much does it cost?
There is a huge amount of variety in price when it comes to flexible personal loans. They can typically range between anywhere from 5% all the way up to 18%. This means that it is incredibly important that you look into all of the various options that are available on the market before you sign up to any loan in particular. There are a huge amount of banks and building societies, along with other lenders, that offer this form of flexible loan, and each one of those lenders will have a variety of different products that may or may not suit your requirements. As a result of this, it often be extremely difficult to find out exactly which product is the best suited to your financial needs and situation. One of the best ways to easily see the various products that are out there on the market right now, is by using a flexible loan price comparison tool. These tools work by searching through their extensive, regularly-updated databases to find out which flexible loans are currently being offered by banks and building societies across the country. This means that you can save yourself a lot of time by not having to scroll through all the various websites of all the various banks and building societies in order to find the one that is right for you. Not only will these price comparison tools allow you to see how competitive the prices but they will also allow you to see other important information on each bank or building society, such as their customer satisfaction rating and so on.
How long does it last?
If you think that a flexible loan is the right way for you to go, then you should also consider exactly how long it is that you want to borrow the money for. Generally speaking, flexible loans are good if you are looking to borrow money for no more than 12 months. If you think that you want to borrow money over a long period that is significantly longer than this, then you should think about looking into standard personal loans. The main reason for this is the fact that, whilst short term flexible loans are good due to the amount of freedom that you have when it comes to making your repayments, they often cost a bit more in terms of interest. Whilst this is not a problem if you pay the loan back quickly, it can often become uneconomical if you take one of these loans out for too long a period of time.
What is the maximum I can borrow?
The big reason that anyone would choose to go for a flexible loan instead of simply using an interest free overdraft or a 0% interest credit card, is the fact that you can borrow much larger sums of money when you use this form of credit. As with all types of credit, there is no one size fits all answer to the question of how much money one will be able to borrow. This, again, depends on your viability as a borrower, or at least how the bank views you as a borrower. This means that if the bank or building society thinks that you are going to be a higher risk than someone else, they will charge you a higher rate of interest. For this reason, it is very important that you do what you can to make your bank or building society view you as somebody who can be relied upon to make your repayments on time and in full. One of the best ways to do this is to give them some form of proof of earning. If you have a steady income and your loan repayments are clearly not going to be too difficult to manage due to the amount that you get paid, then it is more likely that your bank or building society will approve you for the loan. There is also a higher chance that they will give you a lower level of interest for it as well.
How can I get this credit?
If you decide that this is the type of loan that is best suited to your own personal situation, then all you need to do next is apply for the credit from the bank or building society or your choice. However, it may be difficult to find such an organisation that is willing to offer a set up as flexible as that. if you start to find that this is the case, then you may want to consider looking into peer to peer lending. Peer to peer lending is a relatively new phenomenon that allows individuals who want to borrow money to be put into touch with individuals who are willing to lend money. This means that you can have a more personal level of contact with the lender and it can often be much cheaper than borrowing through a high street bank. One example of the interest rates that can be done through peer to peer lending is that you can borrow £7,500 for four years at a rate of only 3.05%. However, if you wish to pay back the loan before the four years have finished, you are fully entitled to contact the lender and inform them that you wish to pay back the loan in full. Unlike with many banks and building societies, these loans can be paid back early without having to be subject to any penalty charges for doing so. At banks and building societies, it is entirely plausible that you could be charged up to one or two months worth of interest as a fine for doing so.
For more information about credit cards, current accounts or loans, please head to our guides section where we offer our users free and impartial advice on all forms of financial product from car insurance to mortgages and everything in between.
Here at Money Expert we also offer a free and impartial loan price comparison service that is designed to help our users make informed decisions about any products that they are thinking of purchasing. Regularly updated by our industry experts, this price comparison tool is a great way to get a feel for what's on the market right now and also to see if you could be saving money by looking elsewhere.