Applying for a Short Term Loan - the ultimate beginner’s guide
Then you may be considering applying for a short term loan. This guide is here to explain everything you need to know about high cost short term loans, or as they are more commonly known, payday loans. From how short term loans work, to alternative options, this guide will help you choose wisely and find the best deal for your circumstances.
How to find a payday loan
What’s a short term loan?
A short term loan (or ‘high cost short term loan’ to be official) is one that’s repaid over less than 12 months at a Representative APR over 99.9%. In the past, these types of loan have commonly been referred to as ‘payday loans’ as they were designed to be paid back on your next payday. Nowadays most short term lenders offer repayment periods of anywhere between 1-12 months.
Are short term loans safe?
In the UK, short term loan providers have to be regulated by the FCA (the Financial Conduct Authority). This ensures that consumers are safe and treated fairly. WARNING: There are unauthorised lenders out there. If you’re not sure whether a site is legitimate, you can search for them on the FCA register. If you’re in any doubt, don’t apply.
What is responsible lending?
Responsible lending is a scheme enforced to ensure lenders only lend to you if you can afford to pay it back.
How many payday loans can I have?
There’s no limit to the number of loans you can take out at one time. However, when you apply for a short term loan, you’ll be credit checked. If the lender thinks you can’t afford to repay the loan, your application will be declined, which will show up on your credit file. It may not be worth making more than one application at a time, as you could end up with a very poor credit rating. That’ll mean it’s harder to find a lender willing to offer you a loan and they’ll charge you more, too!
How long will it take for my payday loan to be approved?
The majority of lenders will let you know if you’re approved almost instantly. However, if there are gaps or incorrect information in your application, it will take longer. Remember that you might need your national insurance number, a pay slip and your employer’s details to complete the form.
No credit check - is this true?
When searching for a short term loan online you’ve probably found companies advertising ‘loans, no credit check’. But before you dive into their application, there’s a few things to be aware of: You’ll never get a loan without a credit check. Credit checks will impact your credit file – applying for lots of loans in a small amount of time will negatively affect your credit score. Companies which advertise ‘loans, no credit check’ are probably brokers, not direct lenders. They may not check your credit history, but once they’ve matched you with a lender and you apply, you will still have to go through a credit check. Some lenders and brokers offer a service where they check your likelihood of approval before you apply. This is a much safer way to compare your options and will increase your chances of acceptance.
How can I get money quickly?
If you need cash right now, a short term loan is an option but it’s not your only option. Before you do anything, check how much you can actually afford to repay and the status of your credit history. If you’re struggling to make ends meet, borrowing more is not the answer.
How to borrow money - what are my options?
If you need cash quickly, you have a number of options - a short term loan is just one idea.
Friends and family
This option isn’t available to everyone, but if your family (or perhaps even your friends) are interested in lending you money and have some savings, this could be a very good solution. Before doing anything, be sure to draw up a contract - check both of you understand how and when you will repay. Most importantly, don’t avoid discussing what would happen if things go wrong.
Credit cards can be a cheaper way of borrowing in the short term compared with a loan. If you pay off your balance in full each month, you won’t be charged any interest. There are a number of specialist cards available, too - these can be compared in the credit card section of our site. If you have a poor credit rating, have a look at credit cards for bad credit.
Unsecured personal loans
Personal loans are great for long term borrowing if you have a good credit file and are looking for a large amount. There are lots of different types of personal loan, from car loans to holiday loans, home improvement loans and debt consolidation loans. If your credit file is a bit patchy, you may not get approved, so have a look at guarantor loans as an alternative.
If your credit history isn’t great but you’re now on a firm financial footing, guarantor loans are an option worth considering. These are a slightly longer term solution, as most guarantor loans will be available for a minimum of 12 months. However the APR is much lower than a high cost short term loan. In order to apply for a guarantor loan you’ll need someone (the guarantor) to back you up. This can be a friend or family member, but they must have good credit and in some cases will need to be a homeowner. Guarantor loans are designed for a very specific set of circumstances and come with the obvious warning - if you can’t meet your repayments, don’t apply as it will be your guarantor that will have to pick up the pieces.
If you have an agreed overdraft, this might be a good option for quick cash. However, there are often a number of fees associated with overdrafts so be sure you understand these before going down this route. If you get hit with unauthorised overdraft fees, it may well work out more expensive than even a high APR short term loan.
How do I choose the right loan?
When you’re comparing loans, especially high cost short term loans, it’s easy to be overwhelmed by the huge Representative APR (often over 1000%). The thing to remember here is that you will never pay this amount of interest. It’s just to show what you would be charged if you were borrowing over a year without any pricing caps. It therefore makes more sense to compare options based on the total amount you will repay. To make it simple, all Choose Wisely short term loan comparison tables are ordered by total amount repayable.
When comparing loans, here are a few other key things to look out for:
Total repayable– the full amount of money which you’ll have paid the lender by the time you’ve finished paying them back
Monthly repayments – how much you will be paying the lender back each month
Representative APR – the rate of interest plus fees that the average applicant will pay the lender. If an interest rate is above 100%, the loan is classed by the FCA as high cost short term credit, which brings in more consumer protection. You may be offered a higher or lower rate than the Representative APR.
Customer reviews – We have compiled reviews from some of the leading review websites. You can read more in the Reviews section of Choose Wisely
Loan term – how long will you have to pay off the loan in full?
Loan amount – how much will you borrow?
Eligibility – do you match the eligibility criteria? Is this loan only for students, or the retired, or people with good credit?
Features – can you pause repayments with a ‘repayment holiday’?
Fees – are there fees for arranging the loan or an early/late repayment fee?
How will I pay it back?
If you’re new to loans or struggling to pay back, you might be wondering how the repayment process works. When you accept the terms of a loan, you usually agree to make monthly or weekly repayments by continuous payment authority (this may not always be the case). This means that the lender will be allowed to charge your bank account via your debit card on the repayment day. Technically you can cancel this, but you’ll still need to repay your debt and cancelling may impact your credit file. You can ask the lender if they will allow you to repay the loan another way, but they aren’t obliged to do so. If you’re struggling to meet your repayments then it’s worth speaking to a debt advice service – a list of these free services can be found in our bad credit borrowing guide.
How much will it cost?
As mentioned above you will never pay the huge APR’s that are advertised by most high cost short term lenders. This is because of the price caps introduced by the FCA, which limit lenders to charging no more than 0.8% interest per day or 100% of what’s borrowed. e.g. If you borrowed £100, you would never repay more than £200. When applying for a short term loan, do be aware of any additional fees that apply (the maximum default fee is £15).
Can I get a short term loan?
Each lender is looking for a different type of borrower. If you’re self-employed, with bad credit and a mortgage, you might be a perfect match for one lender but declined by another. The factors that a lender uses to decide whether to accept your application are called ‘acceptance criteria’. It’s important to find out the criteria before you apply - have a look at the lender’s page on Choose Wisely. The key thing when applying for any type of finance is to compare your options and check that you match the criteria before you apply. If not, chances are you’ll be declined. As a minimum, you’ll need be at least 18 years old and be a resident of the UK.
Payday loans for bad credit
Even if you have bad credit, you still have options, just make sure you read the lender’s acceptance criteria before you apply. If you’re in any doubt, don’t submit your application. As mentioned above, there are alternative options if your credit history isn’t great. Here are some comparison tables that may be handy:
What if I can’t pay it back?
Before you even apply for a loan, have a look at your finances and check that you will be able to afford the repayments. If there’s a possibility that you won’t be able to pay on time, in full, then don’t apply. Taking on debt that you’re not able to pay back will have serious consequences not only for your credit file but your personal and financial health. If you already have a loan and you’re struggling to make the repayments, the first point of contact should be your lender. They may be able to help you out by reducing or delaying your payments, but it’s possible that this won’t be enough, or may not be realistic. If you’re struggling and you feel like there are no other options available speak to a debt advice charity. For a full list check out our ‘What to do if you’re struggling with debt’ guide.
What should I do before I apply?
What can you do when applying for a loan to improve your chances of approval?
- Check your credit file is up to date
- Fix any errors on your credit file
- Use your credit rating to work out which lenders are likely to accept you
- Use the Eligibility Checker to find suitable lenders
- Read the lender reviews and product pages to decide on a lender
- Check the eligibility criteria to make sure the lender could accept you
- Fill in your application honestly and accurately
- Before submitting, check through your application for mistakes
Warning: Late repayment can cause you serious money problems. For help, go to www.moneyadviceservice.org.uk
Mark joined Choose Wisely in 2015. He continues to work in close contact with the providers, brokers and journalists operating in the world of consumer credit.