Short term loans have been around for a while now and they are constantly evolving to meet consumer needs and new regulations. There used to be only payday loans where you could borrow a small amount of cash and repay it, with interest, on your next payday. These were designed to help people manage their cashflow and unexpected expenses and were particularly important for people who had a bad credit history or low credit score and couldn’t borrow anywhere else.
These days, instalment loans tend to be more popular than payday loans. Instalment loans are still short term loans but instead of having one repayment date, you can have up to twelve payments, spread over 12 months. This helps split the cost of repaying your loan so you can more easily manage your money.
There are several reasons people may need to borrow in an emergency which is why payday loans companies keep application forms quick and simple. Usually, it takes no more than 15 minutes to apply for an instalment loan and you’ll almost always get the lending decision on the same day. This is thanks to automated algorithms that allow lenders to assess your application without manual handling. If your application is approved, you’ll receive the funds almost instantly so you can resolve your financial issue quickly and with minimal stress.
An instalment loan is a type of high cost short term credit that allows you to borrow a small amount of cash over several months. They accrue interest throughout the loan term and have an APR of over 100%, and a maximum daily interest rate of 0.8% per day. This daily interest rate works out to an annual rate of 292% per annum (pa) or to a daily cap of 80p per £100 borrowed. Instalment loan lenders are regulated and authorised by the Financial Conduct Authority (FCA) and most lenders offer their service online for fast application and easy loan management.
If you’re faced with an urgent financial obligation, for example if you need a laptop for work but you can only have the item expensed at the end of month, you may consider borrowing money in order to finance the purchase if you don’t have the cash available in your bank account. Some people may use a credit card or their savings. But if you aren’t fortunate enough to have decent savings yet, or if your credit history is excluding you from mainstream credit, you might have limited borrowing options. This is where short term loans, and specifically instalment loans, can help.
Instead of suffering from a cashflow shortfall for a few weeks or months, an instalment loan allows you to cover the emergency expense and repay the balance with interest over the next few months. If you took a payday loan, you might have to repay £150 out of your next paycheck. Whereas with an instalment loan, this is more likely to be £50-£60 over three months. Although an instalment loan costs more overall, as you’re borrowing for a longer period, the smaller individual repayments are often much more manageable and require less budget adjustment, so you can continue your usual daily spending with minimal impact.
It's comparable to buy now pay later schemes which offer to split your total shopping bill over 3 or 4 months so you can pay smaller amounts over a longer timeframe, instead of a lump sum payment which might be unaffordable right now.
However, just because instalment loans are easy to apply for and cater for those with a low credit score, it doesn’t mean they can resolve every financial issue. If you are worried about your finances or you are suffering from long-term financial difficulty, borrowing money is very unlikely to help. You may end up missing your repayments which can cause further financial difficulty and make credit harder to obtain in the future. If you’re struggling with your money, contact a free debt advice charity for help – they will be able to offer tailored advice to help you get back to normal.
If you’ve decided an instalment loan could help you out in a time of financial need, there are a few things you should check before you submit an application.
It may sound basic but sometimes giving some extra thought to your budget or adjusting your spending for the rest of the month can free up enough funds to make the payment without borrowing. Your first option should never be to borrow money as it will cost you more to repay the interest than it would to cut back on non-essential spending for a few weeks.
Instalment loans may all seem the same at first, but when you compare the market loans are actually quite different between lenders. Comparing instalment loans before applying could save you money and make the applications and repayments easier to manage. You may even decide that a payday loan is better for your particular borrowing need.
Even if you’ve checked that you can’t pay out of your existing funds, and you’ve compared your options first – you need to check that you can afford the repayments, before submitting your application. It may sound obvious, but we can often forget irregular payments and underestimate how much our priority bills accumulate to. Do a quick check of a previous bank statement to make sure you’ll have sufficient disposable income to make your loan repayments over the next few months, and then check you have no one-off or annual bills that could interrupt your cashflow. You may just need to adjust your budget a little more but being prepared will make money management much easier and less stressful.
Instalment loans are not the only borrowing option if you have a bad credit history or if you need cash urgently, but they can help you resolve those temporary financial shortfalls quickly and they can make loan repayments easier to accommodate.
All you need to know about short term loans
The best saving tips, budget ideas and ways to improve your financial health