Guide to short-term loans
- A short-term loan is a lending product with a considerably reduced term
- A flexible option may appeal if you don't want to stick to a strict repayment plan
- Make a soft search when looking for a deal to avoid damaging your credit rating
- Explore other options like 0% overdrafts and credit cards
- Beware of payday lenders, which advertise short-term loans, but with extremely steep interest and charges
Although there are dedicated short-term loan options available, borrowing money doesn't necessarily mean that you have to take out a loan product.
There are different avenues you can explore to find the right fit for you, especially if you're looking to borrow a small amount over a short period of time.
Consider before taking out a loan...
How much do you really need? If you're eligible for a larger loan, it may be tempting to plump for more money, but this could end up biting you on the derriere as you'll just have even more debt to pay off.
Be realistic about the loans you're likely to be accepted for as failed applications can impact on credit ratings held about you.
Gocompare.com's smart search tool can help you with this by making what's known as a soft search.
This will indicate the loans you're likely to be accepted for before you make an official application, meaning that you avoid damaging your credit record when doing your research.
Also think about how long you'll need to borrow the money for and be realistic about whether this is enough time to repay it. Remember, if you aren't able to afford the repayments, you risk paying costly charges as well as interest and could damage your credit rating.
Read more in our beginners' guide to loans.
There are various loan options to evaluate before making a decision, all of which have advantages and disadvantages to take into account.
A few lenders will offer flexible loans which allow you to draw down loan money as and when you need it and choose how much you repay each month, subject to a minimum repayment amount.
Others will offer personal loans that don't charge you for partial or full early repayments, so you have more flexibility to repay early without penalty.
To make a partial or full early repayment, you need to give your lender notice of this and, once the payment is agreed, it needs to be made within 28 days.
For both these types of loans you won't be charged for repaying the loan off in full early, so they can be used as a short-term loan.
However, both types of loans usually have a higher APR than that found on typical, inflexible personal loans. Also, be warned that a borrowing fee may apply which will need to be paid whether you repay the loan early or not.
One option that you may want to explore is peer-to-peer lending, or crowdlending, which lets individuals borrow money directly from investors and savers.
Many peer-to-peer lenders allow you to repay early without penalty, so they can be a good short-term option.
You'll have to undergo stringent checks before being accepted for a loan, though, and the rate you're offered will depend on your creditworthiness.
If you compare loans through Gocompare.com you'll see peer-to-peer options alongside more traditional products and will have the opportunity to either filter these out of your results, or to only look at peer-to-peer options.
Could you borrow the money you need from family or friends? If so, draw up a contract to outline the repayment amounts, interest rate (if required) and loan periods to avoid any arguments further down the line.
It's also a good idea to check your benefactor is comfortable with what you intend to spend the loan on.
If you regularly make use of an overdraft, Gocompare.com's advanced midata bank account comparison tool can be a great way of analysing the actual charges you pay
Credit unions are not-for-profit organisations which pool members' savings and lend them out to other members.
You'll need to be part of the community and some will require you to save with them for a certain amount of time before taking out a loan.
This may be a good option for those who potentially could repay their loan early, as credit unions tend to be quite flexible.
Avoid payday loans
Payday loans receive bad press for very good reasons. They have incredibly high interest rates and you can get smacked with charges if you aren't able to make your repayments.
Other forms of borrowing
0% credit cards
If what you're purchasing can be paid for on plastic, then you may be able to use a 0% credit card as an interest-free and flexible loan.
The length of the 0% introductory period is dependent on the card and when it ends you'll be switched to a less favourable rate, so always check the terms and conditions.
This option could be a possibility for those with a good credit score, but be aware that you'll need to pass a credit check before being accepted, which will take into account your credit history and income.
Also you'll need to pay at least the monthly minimum payments to avoid getting charged.
Remember, all credit cards give you at least a month interest free, so if you only need a very short-term loan, any credit card could be an option if you can pay it off in a few weeks.
Low APR credit cards and balance transfer cards could be other options worth considering as an alternative to loans, subject to the same warnings with regard to making at least minimum repayments every month and having a workable plan to clear the debt before higher charges kick in.
You may be able to switch to a current account with a 0% or low-interest overdraft, or extend your existing overdraft.
If you don't have a 0% overdraft, check whether the interest or fees on a normal overdraft would still be cheaper than taking out a loan.
However, remember that if you exceed your authorised overdraft limit, you'll be charged until you're back in the black.
Note that a 0% overdraft may only be available for a certain period set out by your bank or building society. By then you'll need to have paid off the debt or switch to another 0% overdraft to avoid charges.
If you regularly make use of an overdraft, Gocompare.com's advanced midata bank account comparison tool can be a great way of analysing the actual charges you pay to determine whether you could make savings by switching to another account.
By Abbie Laughton-Coles