Popular Types of Short Term Lending
There are many types of short term loans available online and further afield across the UK, with some being more popular options than others. Whilst there are more specialised loans available for specific uses, types of borrowers and circumstances, others dominate the market partly due to their flexibility and availability to large numbers of prospective borrowers. These include:
- Payday Loans
- Instalment Loans
- Logbook Loans
Payday loans are well-known with provider such as Wonga having hit the news in recent years. However, other such as instalment loans are not as widely known as payday options, but are not too far behind, being taken out by thousands of people for numerous purposes. Used properly, all of these loans are able to help the borrowers move forward and out of short term debt. They can also be the pathway to starting a small business or covering unexpected bills or costs.
However, as with other similar, widely available options such as overdraft facilities and online guarantor loans, none of these should be used as long term options for acquiring finance as this can lead to longer term financial difficulties.
Arguably the nest-known short term finance option available to date. These are designed to tide borrowers over until their next payday. Often used to cover unexpected bills and repair costs that arise, these loans have the ability when used correctly to ease the burden on the borrower. Typically, payday loans range from much smaller amounts; around £50 to £1,000, depending on the criteria of each lender.
However, whilst easier to apply for and more widely available, their interest rates are higher than a traditional loan. Therefore, it is important to only apply for what you can afford to repay over the agreed repayment period.
How Does It Work?
For example, someone earning £3,000 per month after rent may have around £2,000 for other expenses and costs throughout the month. However, their car which they use to get to work breaks down and they need to quickly get it repaired to avoid any further problems. Costing £400, the money is not yet available to the requiring party. Therefore, they can take out a loan for £400 to be repaid at the next payday (usually around the end of the month) plus interest.
Used correctly and paid off in a timely manner, these loans can serve a very important purpose and can in fact help improve a credit rating by demonstrating an ability to borrow a repayable amount of money, repaid within the set timeframe. This is a positive signal to future lenders about the borrower in question.
These loans are not too dissimilar from payday loans in that they can also prove themselves as a short term financial solution. The fundamental difference between loans like payday loans even credit cards (that can also act as a form of short term credit) is that with an instalment loan, the repayment period for the borrower is significantly longer. Most instalment lenders allow up to 12 months for the borrower to repay their loan.
This is in stark contrast to a payday loan which often does not allow for repayment periods of longer than a month or two. The noticeable difference with an instalment loan is that the repayments are much more manageable and do not need to be paid in one go. The amounts required to be paid are therefore smaller and are intended to fit better within a borrower’s financial constraints.
How Do They Work?
The same person as in the previous example may realise that with their routine monthly expenses and costs, the £400 plus interest (amounting to around £500 with a payday loan) is too much to be able to commit to paying in one go. However, their car needs fixing as it will otherwise impact their broader income and travel to work on a daily basis.
Rather than having to wait a number of months to save up the money or risk a payday loan, where if they miss a payment they will be penalised and will negatively impact their credit score, they look towards an instalment loan.
Instead of having to repay a difficult amount in one go, they can agree terms with an instalment lender of £400 repaid over 4 months. Repayments will be spread over this period, allowing the borrower to repay a much more manageable amount each month until their debt is cleared, having a lesser impact on their day to day lives that in the case of payday loans.
Logbook loans are a well-established secure loan option. These work by the borrower securing an amount of money against their vehicle which acts as collateral for the loan. A major benefit of these loans is that because there is a degree of security, the risk for the lender is reduced, reflected in the lower interest rates applied to these loans. Furthermore, because of the secured nature of these and dependent on the value of the vehicle in question, loan sizes range from around £500 to around £50,000, secured against the V5 document or ‘logbook’ of the vehicle.
How Would It Work?
A borrower might require £5,000 in order to start up a small business. However, they cannot secure this against their property as they already have a mortgage and a second charge loan would be too costly. Payday loans will not provide a high enough loan amount and their friends and family are not in a position to lend what they need.
Owning a car valued at £12,000, the borrower can apply for a logbook loan which will secure the loan against the vehicle. Subject to agreeing repayment terms, the loan can be funded in full with the borrower making regular monthly repayments to cover the debt plus any interest; allowing the business investment necessary.
It is important to note, that with logbook loans there are conditions to taking out this type of finance and these should all be considered from the outset:
- These loans are a secured form of borrowing which means that if the borrower defaults on their loan they are at risk of losing the vehicle in question
- You must be the owner of the vehicle which the loan is secured against. These loans can therefore not be secured against a vehicle on a lease plan, hire purchase or similar
- Many lenders will not consider vehicles used for business purposes for the purposes of a logbook loan as should the borrower default and the vehicle seized, they will enter into a spiral of debt they will find difficult to exit