Short term loans
While most personal loans are used for making a larger purchase that you might not be able to afford to pay all in one go, there is also an option for those who want to borrow a small amount just to tide them over. In the past they have been called payday loans but are now usually referred to as short-term loans.
A short-term loan is normally taken over 30 days (but can be as long as a few months), simply as a way of topping up your bank account balance if you’ve had some unexpected expenses. While they can come with a very high interest rate, they are useful for those who just need to borrow a small amount over a short period of time.
What is a short-term loan?
A short-term loan is a small amount of money that is to be borrowed over a much shorter period of time than most standard personal loans. It is usually borrowed to top up your account balance and tide you over until your next payday.
While short-term loans can be very useful as a last resort, they come with a very high interest rate compared to other personal loans, which means if they are taken out over a longer period, you can quickly accumulate debt until it is paid off in full.
How can I spend my short-term loan?
Since you are borrowing a small amount of money, you can’t usually spend your short-term loan on anything major, but it can come in handy if you have lots of small payments to make before your next payday.
It might be that you’ve had unexpected payments to make at the start of the month, meaning that you will struggle to cover the rest of your expenses for the month. On the other hand, you might have an unexpected payment you need to make, despite your account balance being very low. That means your short-term loan will be able to cover:
- Utility bills
- Mobile phone contract payments
- Food shopping
- Boiler or home appliance repair costs
- Car repair costs
Is a short-term loan right for me?
If you are struggling to afford your expenses due to unforeseen events (boiler becoming faulty or your car breaking down), then a short-term loan might be a good option to get you to the end of the month, as long as you know you can repay the loan in full when you are paid.
However, if you are planning to borrow the money for longer than a month, you might find that the debt can accumulate very quickly due to the high interest rate. This makes a short-term loan a bit expensive if you aren’t able to pay it off quickly, since you can end up paying more than double your original loan amount over just a few months.
A short-term loan should always be used as a last resort, rather than something you do every month or multiple times within a short period. This kind of borrowing can lead to you spiralling into debt, so always think carefully about whether a short-term loan is the right option for you.
Advantages of a short-term loan
- Borrow a small amount to cover unexpected or additional payments
- They are often easier to be accepted for, even if you have a bad credit rating
- You can often borrow the amount you need very quickly
Disadvantages of a short-term loan
- They come with a very high interest rate
- You can accumulate more debt very quickly if you take it out for a few months
- If you can’t pay it back in the agreed time period it can impact your credit rating