Warning: Late repayment can cause you serious money problems. For help, go to moneyhelper.org.uk.
Please note: High-cost short-term credit is unsuitable for sustained borrowing over long periods and would be expensive as a means of longer-term borrowing.
We can’t always predict what’s around the corner, and sometimes unexpected costs can leave us short until payday. If you’ve found yourself in this kind of situation and need to borrow money, a short term loan might seem like a way to bridge the gap. But, while these loans are fast and convenient, they’re also extremely expensive.
On top of that, fewer and fewer lenders want to offer these loans, meaning there’s less choice and competition for consumers. There are a number of sensible alternatives however, and some of the older payday lenders have reinvented themselves and are still trying to serve the same sorts of customers with more innovative products.
A small number of specialist lenders (such as those listed above) offer fast, easy but very expensive loans online. Companies like Wonga, with fairly relaxed eligibility criteria but horribly interest rates made their names offering this service to people who might struggle to get credit elsewhere.
The loans involve relatively small sums – from as little as £50 up to around £500 – but if it’s your first time using a new lender, then it’s likely to want to start small.
Applying for and receiving your loan can take as little as a few minutes – it’s scarily convenient. When you apply or a one month loan, the lender will run affordability and credit checks to make a decision on whether or not to formally offer you the loan. The lenders aren’t expecting perfect credit histories by any means – but they must be careful to only lend responsibly. In other words, they’ll need to be sure that your regular income and outgoings would make the repayment manageable. You may find that the lender is willing to lend to you, but is only willing to lend a smaller sum than you’d initially hoped for.
In most cases, you’ll make a single repayment at the end of the month – on or just after your payday, using something called a “continuous payment authority” (in other words you won’t need to log-in and make a payment – the funds will be automatically transferred from your account on a pre-agreed date). You’ll pay back the original sum you borrowed, plus a hefty chunk of interest on top.
High cost short term credit is regulated by the Financial Conduct Authority (FCA), which states that borrowers should never be charged more than 0.8% interest each day. Unfortunately, most lenders have opted to set their rates right on, or fractionally under, this limit.
That means that if you were to borrow £100 for 30 days, then provided you used a legitimate, authorised lender and you paid the loan back on time, you would pay a maximum of £24 in interest. £200 borrowed over 30 days would cost a maximum of £48 in interest, and so on.
Most lenders will allow you to repay a short-term loan early. So if you’re set on this type of loan, you may also wish to compare lenders with terms starting at, say 3 months, but who state you can repay early without penalty and save on interest. Only consider this option if you’re confident you’ve got the control not to let the loan drag on longer than the 1 month.
You can use the one month loan calculator above to get estimates of the overall cost.
Most lenders in this space aren’t looking for flawless credit records, but you will need to meet the following criteria:
You more than likely do. In fact we’ve written an article looking at payday loan alternatives.
First off, you should only use high-cost short-term credit as a last resort – don’t take out a payday loan if it’s not for a truly essential expense.
Borrowing from friends or family can be awkward but it’s invariably a cheaper option.
If the expense is big, one-off bill, then you might also be able to come to an arrangement with the company billing you – it’s often worth a quick call to the customer service department to see if a payment plan would be an option.
An authorised overdraft will usually work out cheaper – so you could contact your bank and ask them for this facility (or if you already have the facility, you could ask for a limit increase). You do have to be careful with overdrafts however – they often involve fairly high interest rates and because there’s no deadline involved, if you end up paying off your borrowing over several months, the costs could soon spiral.
Check out our full list of alternatives or visit the MoneyHelper to learn more.
1 month loans best avoided. If you’re hit with some unexpected costs, look to those alternatives first, and better still, where possible, defer the expense altogether. Though these loans are fast and convenient, they come with very high interest rates.
If you need to cash a cheque, it may take up to 3 days to clear it with a bank. Cheque cashing services give you immediate access to your money.
Facing unexpected costs? Find out all you need to know about Wonga’s simple and quick loans.
Sometimes you may need a little longer to pay off your loan – this is where a bad credit installment loan could work for you. Read on to find out how to apply.
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