Have you ever been in a situation where you needed to borrow fast? Financial emergencies arrive in different forms. A sick dog requiring a visit to the vet, or the car broke down before an important trip, or you just needed some cash to cover your expenses until your salary was credited. This is where short term loans come in.
An emergency fund is the best resort for some quick cash. However, for many, the current financial crisis and rising cost of living make it challenging to save enough spare change after paying off debt, taxes and essential expenses.
That’s when most people turn to short term loans, and in this article, we’ll explore the top 3 reasons why short term loans are a safe option for UK borrowers
What are Short Term Loans?
Most traditional high-street banks do not offer short term loans, but online lenders do. Unlike personal loans, where you can borrow a significantly larger amount for a more extended period, short term loans typically allow you to borrow smaller amounts with a shorter repayment period.
With payday loans, you get time until the next payday to repay, while short term loans can offer anywhere from 3 months to 18 months for repayment. It can vary from lender to lender.
Now, let us look at the advantages of short term loans over other lending options:
1. Easy Availability
Unlike conventional personal loans, short term loans have a quick application process with more lenient approval criteria. Most lenders use an Open Banking system, which means they do not rely solely on your credit score to determine loan eligibility.
With short term loans, the entire application process is often done online with minimal paperwork. They are also more flexible, even approving loans to people with poor credit scores (something conventional lenders are more stringent about).
The approval process is quick, taking anywhere from less than 24 hours to 2-3 working days, making it ideal for people in a financial crisis. The money is credited to your account immediately upon approval.
When borrowing from a bank, the paperwork is often too cumbersome, making it an ordeal, and approval can take anywhere from a few weeks to several months. This can pose a challenge for those who need immediate cash.
By being more flexible with their approval criteria, short term loans are more inclusive.
2. Reduced Long-term Financial Commitments
Personal loans typically have a repayment tenure of 12-84 months. While advantageous, as it reduces your monthly payments, you often end up paying more in interest and remaining in debt for a much longer period. This not only takes a financial toll but also a mental toll. Let’s be honest, nobody likes to be in debt.
Some traditional lenders often have early repayment fees, where they can charge you an extra fee for repaying your loan before the pre-decided time. This is usually not the case with short term loans. Most ethical lenders do not levy any early repayment charge.
3. Highly Regulated and Transparent
The Financial Conduct Authority (FCA) regulates short term loans. When you are borrowing from ethical lenders, you can rest assured that you will not be subject to any malpractices and can seek proper redressal.
The FCA has introduced strict terms and conditions for high-interest loans, such as payday and short term loans. This includes a maximum daily interest rate of 0.8%, a maximum default fee of £15 and a total cost cap (you’ll never repay more than 100% of the borrowed sum in interest and fees). For example, if you have borrowed £500, the amount repaid cannot exceed £1000.
Under the FCA guidelines, lenders must conduct mandatory affordability checks. These checks assess income and essential expenses and help lenders avoid lending to financially ineligible borrowers, safeguarding both lenders and borrowers.
To ensure fair lending practices, lenders must provide clear, easily understandable information about interest rates, fees, and the consequences of late repayment. This will ensure that borrowers can make an informed decision.
Final Words
Short-term loans are increasingly popular among borrowers because they are easily accessible and safer. As part of your due diligence, you must conduct thorough checks and research to identify ethical, regulated lending platforms. Working with ethical lenders ensures you are treated fairly and have access to consumer-focused terms.
Debt can be a beneficial tool, but without proper management and repayment strategies, it can lead to a debt trap.
While short term loans are safer and easier alternatives, it is still essential to be totally aware of the risks and responsibilities of borrowing.
