Short Term Loans Explained
Warning: Late repayment can cause you serious money problems
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Representative Example: Representative 1286.98% APR on a loan of £300.00 with 5 monthly repayments of £101.03 Total amount repayable £505.13 Annual interest rate (fixed) 290%
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Author: Internal Marketing Department
Short term loans in UK are essentially cash advances whose repayment period varies from 2 weeks up until one year. They carry a fixed interest rate and are usually used when you have an unexpected bill or expense. This is where the loans come in handy by filling the income gap and, afterwards, when you have the money, you can repay them.
Although this industry has seen some new regulations and changes in regulations recently, short term loans are still one of the viable options when the question of short term financing arises and numerous individuals and institutions still rely upon them.
Who uses short term loans?
Here are some conclusions made by the latest studies and projects when it comes to the matter at hand:
- People who apply for this kind of loans sometimes have low incomes. In fact, some of them generate income below some poverty lines. This raises a serious issue and doubt about functioning of the industry;
- Numerous surveys have shown that more than half of all the borrowers’ don’t have any access to other forms of credit;
- These loans serve in order of covering day to day expenses, but also other expenses that household might have, such as food and rent expenses or paying bills. Very small percentage of the borrowers use the loans for discretionary purposes;
- Several polls have shown that big percentage of borrowers don’t choose their lender based on the price offering, but based on how fast the lender’s loan processing is. It is claimed that advertising is allegedly responsible for this selection criteria;
- There are two main reasons for the increase of short term loans in UK. One of them is the low income population’s dependence and using of the loans in order to meet day to day expenses is also a factor accounted for repeated borrowing;
What are some main characteristics of borrowers?
- The borrowers that use short term loans are usually people who urgently need the money and they don’t have access to any other form of credit;
- The only goal of the borrower is to quickly put his hands on the money. Instead of researching lenders and choosing carefully, they only want their bank account to be richer for the amount of the loan quickly;
- The lenders sometimes don’t inform the borrower of all various conditions and terms each loan is offering. The borrower also often doesn’t ask for this information. This has a lot to do with psychology, because in the borrower’s mind they perceive the lender as someone helping them in trouble and they feel grateful to him, so they don’t ask him any more questions;
Various costs involved
Borrowers often complain about the late fees the lenders charge them and this is usually due to them not understanding everything correctly at the time of receiving the loan. So, we’re going to focus on clearing up various costs involved with a short term loan.
- Loan rollover fees – while many lenders no longer charge for setting up the rollover itself, the additional months interest is on top of the initial cost of the loan.
- Late payment fees – they are charged when a payment is missed and usually varies from lender to lender. The FCA cap on these fees is £15 where the loan falls into the category of High Cost Short Term Credit ;
- Default interest charges - this may be one of the most troubling things for the borrower when he is taking out a loan. Default interest is charged on the whole of the remaining capital from the day you default until either the payment is made or the cost cap is reached.
These fees often affect borrowers without their knowledge, as their nature is to get the money quickly and that is usually more important than the consequences of not repaying. Then again, half the blame lies with the lenders, since they sometimes don’t focus on advertising responsibly, but they target vulnerable groups like parents in a financial crisis or single income households, Eventually, these groups are only dropping into more unstable situation, with most of them taking more new debts just in order to clear the previous ones.
What are the drawbacks of a short term loan?
There are many positive aspects of getting a short term loan, such as easy access to fast cash, no credit approval and no long term commitment, but we will now discuss some drawbacks:
- High interest rates: The biggest drawback there is when it comes to short term loans in UK. They are generally higher than usual, since the lender has to off set his increased risk of this group of borrowers;
- Add to the interest: Short term loan should not be treated as an additional source of income, but only for emergencies. People often fall into a trap called ‘cycle of debt’ with these types of loans;
Short term loans can be a big advantage, but only for people who are being responsible with their finances and are strict about paying their debts in time. On the other hand, for those looking to exploit these services, it is a major disadvantage since the interest rate often pile up and lead to a disaster for your finances. To conclude, the main thing that you need to do is to understand why you need this loan and give your best to repay it as soon as possible. It is also strongly advisable to limit your interaction with a broker in case of choosing the mode for applying to get these loans. After all, the famous quote ‘Better to be safe than sorry’ could not be more true in this situation.