The loans industry is one that has undergone huge changes in the last few years. With increased regulation, bad press and increased providers, it has become harder than ever for potential customers and borrowers to wade through all the information around and decide whether or not taking out short term finance is worthwhile and what the advantages and potential pitfalls of such a loan may be.
While other loans such as payday loans and mortgages have been around for a very long time and customers generally know what to expect and to look for, short term options are a fairly new development in the lending industry.
Being able to take out a loan in the short term, be it via unsecured loans or otherwise, bridges the gap between the traditional loan from a bank or high street provider and the more modern day alternative, payday loans that can be the quick injection of cash needed.
Whilst ‘traditional’ loans may last for many years and tie the borrower into repayments for a long time, regardless of the amount they borrow and with fees imposed for early repayments it can be a difficult decision to take. Conversely, payday loans by nature serve the purpose of being able to provide quick funds, repaid as soon as possible.
However, with payday loans, interest rates will always be higher, as it is an immediate service and these loans are easier to take out, with shorter applications and no face to face meetings or assessments as might be expected if dealing with a bank or traditional provider.
Loans at both ends of the spectrum though, serve potentially useful and important purposes and when provided and utilised correctly with best practices in mind can be fantastic resources to all nature of borrower.
For example, a mortgage is typically taken out over a number of decades. A mortgage borrower will agree with their provider the overall mortgage cost, the type of mortgage and the length of the entire loan. Mortgages will usually last anywhere from 10 to 30 years. The advantage of such a prolonged period for repayments is to spread out the cost of hundreds of thousands of pounds that simply cannot be repaid in a few months.
With payday loans, borrower will borrow loans of smaller amounts, for example £1,000. These loans are usually used for emergencies when one’s monthly budget just won’t cover what is needed. This may include boiler breakdowns and household bills that need paying.
These loans will be repaid within the space of a month or so and usually last until the borrower’s ‘payday,’ when the repayment plus interest is repaid in full. This is a convenient way for borrowers to find a stop gap for those times when money is tight.
Since regulations imposed by the Financial Conduct Authority (FCA) though, interest rates cannot be higher than 0.8% per day of the loan and once the value of the loan and its interest has reached double the original amount, no more interest can be added as per usual.
A short term loan, as part of a short term finance package or arrangement takes the best and most desirable elements of payday loans and traditional longer term loans and repackages it all into one, simple solution.
Say for example you need to borrow £1,000 as a result of an unforeseen emergency, but are worried about the amount of interest you may be charged if it is taken out via a payday loan, you may look to more affordable solutions. A bank will be unlikely to lend you what they will deem to be a small amount and you will not be able to find traditional providers to repay over a longer period.
A short term finance package however, provides the perfect hybrid and a logical and natural solution. You are able to borrow a payday loan-type amount and repay it over a more prolonged period of time.
Whilst the interest may be higher than that of a bank or high street lender, short term finance packages do have a number of significant advantages:
More manageable repayments
Smaller amounts (as low as £100 or less) can be borrowed
The ability to repay the loan early
Funds can be delivered to a dedicated account the same day
Set amounts to repay each month
Interest is incorporated into each months’ payment