How does a short term loan work?

How does a short term loan work?

A short term loan can provide a solution when you’re having minor cash flow problems.

Unlike a traditional bank loan, which is usually paid back over several years, a short term loan is designed to be paid back often within several months.

They could be used for emergencies, such as car repairs or a broken boiler. There are several types of short term loans on the market, but in most cases the main steps are the same:

  • You agree an amount you can afford to borrow with your chosen lender, which will include the interest rate and total amount you are expected to pay back.
  • You agree on a term to pay the loan back in full, whether it’s one payment or several.
  • You agree with the lender the best date for you to make repayments.
  • The lender will usually carry out a credit check to assess your financial history.
  • If your application is successful, you receive your loan.
  • You begin making repayments on the agreed date until the loan is repaid in full.

Whichever type of short term loan you decide to take, we always recommend that you only borrow what you can afford and avoid missing payments, as this can lead to late-payment fees which can be steep. And, if you do find yourself in a situation where you’re struggling to make a repayment, always contact your lender to try come to an arrangement.

Here are some of the key differences between the short term loan types on the market:

Payday loans

As the name suggests, a payday loan is designed to give you the money you need with a view to paying it back in full on your next payday, including any interest charged. However, some payday lenders will allow you to spread the payments over a few months, which will mean incurring more in interest charges. [1]

Doorstep loans

Once you’ve been accepted for a doorstep loan, which will usually involve completing an affordability assessment in your home with a customer representative, the cash will be delivered to your home in person. [2]

Online/instalment loans

Much like other types of short-term loan, online/instalment loans are typically suited to people with lower credit ratings who want to borrow low amounts. [3]

The main difference with this type of loan is that it can usually be paid each week or month for up to a year, with payments taken straight from your account. You’re also unable to apply face-to-face, unlike a doorstep loan.

Credit union loans

As credit union organisations are all unique, their terms and conditions can vary. Credit union loans are typically only open to members but often offer capped borrowing rates and reduced fees and charges. Payments are usually taken automatically from your bank account on a monthly basis until the loan is paid in full with interest.

 Whichever type of short term loan you choose, it’s important to work out exactly what you can afford and understand the full amount you are expected to repay, as well as reading the terms and conditions in full. Short term loans should only be used to assist with minor, more immediate cash flow problems, and shouldn’t be considered to assist with larger, long-term debt issues.

If you feel that you are struggling with debt, you can seek free, impartial advice from the Money Advice Service, National Debtline or StepChange.


[1] Taken from The Money Advice Service – Payday loans: What you need to know. Retrieved Feb 9th, 2018.

[2] Taken from Provident -  Personal Credit – How it works. Retrieved Feb 9th, 2018.

[3] Taken from Citizens Advice – Home credit (Doorstep loans). Retrieved Feb 9th, 2018.



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