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Life comes at us fast and it's often the case that emergency payments or cash flow problems hit when we least expect it and when we are least prepared. Unexpected payments have a weird way of appearing when we have the least amount of money in our bank account, don't they?
If you find yourself with money problems and in need of a loan, two great options to tide you over are short term loans and payday loans. Short term loans and payday loans can come to your rescue in an emergency. Both of these loan options allow you to borrow money quickly and pay back the lender within a short time frame. So, short-term loans vs payday loans, which is best for you? There are some similarities and some distinct differences between short-term loans and payday loans that you should consider, before choosing which one is right for your situation.
Let’s start with defining what a short term loan is...
Short term loans, put simply, are personal loans that you pay back in a short amount of time. The use of short terms loans has become increasingly popular in recent years. The cost of living in this day in age can be very close to our income levels. This results in low amounts of savings in our bank account for emergency payments. When we are faced with an unexpected payment or bill short terms loans are a go-to option to help us keep our heads above water. If we are experiencing money problems or, even just a lack of savings and an unexpected car or home repair pops up, accessing a short-term loan can save the day. Instead of having to fork out hundreds or thousands of pounds instantly we can borrow money, and pay back the loan over some time, easing the pressure.
A short term loan is a financial product where lenders give borrowers a cash advance loan into their bank account. The borrows then repay the loan in monthly installments plus interest. Short term loans are usually paid pack between 30 days and 12 months. The longest term that you will pay back a short-term loan is 18 months. This differs from a long-term loan. Long-term loans are generally available for a loan term of 2-3 years, with a relatively low-interest rate.
Short-term loans offer a smaller loan amount usually between £250-£1500 that often comes with a higher interest rate. You might be able to get up to £5000 with a short-term loan. The longer the term of the loan, the more interest added when you pay it back.
Loans are a more expensive way of spending money so should only be taken out for essential purchases.
A payday loan is similar to a short term loan in many ways. Payday loans are often a small loan that is paid in a short period. The key difference is that a payday loan is meant to be paid on your next payday. Traditionally payday loans were repaid within 30 days. These days repayment terms can vary between 2 weeks up to 3 months maximum. The loan amount is typically less. Payday loans are usually from £50 - £250. Payday lenders often charge a higher interest rate the shorter the loan term. Even though interest is typically higher due to the shorter length of the repayment terms, it can work out to be cheaper than a short-term loan overall.
If you need to borrow a smaller loan amount, then a payday loan might be a better option. You can pay back the lender, with interest on payday and then move on without having to think about it ever again. If you need a higher loan amount then you may wish to take out a longer loan agreement and allow yourself some breathing space on the repayments.
Both short term and payday loan lenders are very accepting of people with many different credit backgrounds.
You can often get accepted even if you have a low credit score. This is because lenders look closely at your ability to afford the loan, rather than your creditworthiness.
If you're exploring short term loans vs payday loans then you might wonder what your other options are. Here are a few to consider:
Taking out a credit card can be a good way to spread the cost of a large expense. Credit cards are like loans in the sense that you are spending borrowed money that will need to be repaid. Instead of having money deposited into your account, you have a card issued to you that you can use to spend up to an agreed limit. Each month you can repay a minimum amount with interest until the card balance is clear and you can continue to use this card as and when you need. You can even find some banks that offer 0 interest on your unpaid balance for the first year.
Credit cards can be a great way to make payments if you are disciplined. They are not a good way to withdraw cash as the interest rates can be very high when you do so.
The cons of credit cards are they can be harder to access if you have existing poor credit. Also, the interest gets added monthly. This means your balance increases and interest rates rise if you avoid making repayments. Payday loans have limits in place. These limits ensure that you never pay back more than double what you borrowed. There are no limits to credit card costs over time. Another disadvantage is that the application process can be lengthy and even when approved, you may have to wait up to 10 working
Short terms loans are also available from some traditional high street banks. Bank loans work much the same as payday lenders or online payday loans would do. You borrow an amount and pay it back in installments with interest over 3 months.
Like credit cards, short term bank loans can be a lot harder to access if you have a poor credit history. They are also less convenient than payday loans as you will often be required to visit the branch in person and wait for a few days for your application to be processed. Online payday loans and short terms loans are more fit for emergencies as they can often be processed in less than 24 hours.
These days, when you are making a large purchase in the UK. The seller may offer their own form of credit of installment payment options. Perhaps they offer buy now, pay later. They might offer the ability to make one large contribution and then pay the rest in monthly installments
This type of financing is often available if you have to buy a new car, boiler, or dental work. Before you take out a short term loan or payday loan it could be worthwhile checking if there are any flexible finance options available. If you find any please be sure to compare the overall cost with the cost of a short-term or payday loan.
One thing to watch out for is that they may also charge a premium price for the product because they offer flexible finance, For example, an electrical company might charge £500 for a boiler when a competitor is selling for £400. They are charging more because they know people who can't afford to pay upfront, may choose them based on the flexible finance option. Keep this in mind when making your comparison.
The application process for a short term loan or payday loan is really easy. The simplest option is to opt for an online direct lender. If approved, you can get your funds in as little as an hour or two. Applying for a short-term loan shouldn’t be any different from a payday loan. Many direct lenders offer both products. They are both loan products so they ask for the same information!
Be aware that your employment status may need to be verified. This might mean calling your employer, or through a third party company before your application is approved.
There a few steps you can take to prepare before you apply for a loan:
Searching and comparing for a loan is arguably the most confusing and time-consuming aspect of the whole process. Let Loanza take the load off by searching through us. We instantly compare the loan products we know to show you the best loans available. You don't even have to worry about whether you need a short term vs payday loan, we will simply show you the best loans that work for your circumstances.
When you get to the application itself, every lender's application varies. Typically, you will be asked for the following:
As much as you might need money quickly to sort out an emergency, you should always read the terms and conditions of a loan carefully. This will ensure you can easily pay off your loan in full within the time given.
Payday loans and payday loan lenders, in particular, can have a poor reputation. These products do cater to people in emergencies who suffer from poor credit. Due to the higher level of risk involved in lending to people with financial difficulty, there are higher interest rates attached to these financial products. You can see why it could be considered irresponsible to lend money to people experiencing financial difficulty or who have suffered from money problems, especially at high-interest rates. Lenders' interest rates, however, are the way that they earn money as a company. If you look at it another way, when we find ourselves in an emergency and need to borrow money these payday loans and short terms loans can really help us out.
The payday loans market has changed a lot over the years and it's no longer the market that gained a poor reputation in the past. In fact, you are now protected by law.
Payday lenders and online lenders in the UK are now authorised and regulated by the financial conduct authority. The financial conduct authority is a financial regulatory body in the United Kingdom. The role of the financial conduct authority is to protect consumers, regulate the market industry stability, and promote healthy competition between financial service providers and lenders.
The FCA have capped interest rates and fees on loans to make sure that borrows don't enter into spiralling payday debts as they could have done in the past. The cost of payday loans is capped by law, under rules made by the Financial Conduct Authority (FCA). When taking out loans it is important that you borrow from one of the lenders who are authorised and regulated by the Financial Conduct Authority. The lenders should also be registered in England or another part of the UK. If you make sure that the lender you borrow with is regulated by the financial conduct authority then your interest rates and fees will be capped.
Someone taking out a loan for 30 days will pay back no more than £24 in fees and charges per £100 borrowed, and if you don’t repay on time, the most you can be charged in default fees is £15 plus interest on the amount you borrowed.
Short term loans are different in terms of length of repayment. Instead of 1-3 payments over 1 - 3 months, they are repaid over 1-18 months. The amount you can borrow is therefore higher. The interest is likely to be lower because the loans are taken out over a longer period.
No, Generally speaking, the application process will be identical in most cases.
No, not necessarily. It all depends on the APR listed and the representative example provided. This example will guide you as to how much you will have to pay in interest and fees. Since payday loans are paid back more quickly, they might work out cheaper!
It also depends on how much you borrow. Both loans may have a similar rate of interest. If you are looking to borrow £500 it will be cheaper to borrow over 1-3 months than 12-18 months. The shorter length of time the less you will pay. You must remember to make sure the monthly repayments are manageable.
Overall, you will find both loans will have similar interest rates so will be similarly priced. The difference will be the amount of time you choose to borrow money for. For example, borrowing £300 over 3 months will always be more expensive than borrowing over 90 days.
The repayment terms will be confirmed as part of your loan agreement. Other than the number of repayments made the terms should be very similar. Some lenders offer more flexible repayment terms such as a lower first-month payment or flexible repayment options.
In general, you can work out which loan product is right for you based on how much you want to borrow and how long. When you're looking for a quick short term or payday loan, think about the following factors:
A payday loan will help you get out of the debt as quickly as possible, so if you can manage that it might be a good idea. A short term loan allows more breathing space with repayments than a payday loan. The shorter the repayment terms on short term loans, the lower the cost will be. The issue with repaying your loan quickly is that the amount you pay each month will be higher.
With many online lenders, both loan products have become linked and instead of having to apply for one or the other, payday loans have become very flexible. You can more or less request the amount you need and how long for within a period of 1-18 months. You may find loans being advertised as both a payday loan and short term loan. Payday loans are a form of short term loan. Short terms loans are not always a payday loan. It's best to read the fine print.
As long as you're happy with the terms, then the terminology of the loan is not something to worry about.
By law, a short term lender cannot charge you interest or fees that surpass the amount of your original loan. Remember to make sure that the short term or payday loan lender you choose is registered with the FCA.
Short term loans and payday loans can be a great and easy way to get quick cash in emergencies. They are available based on affordability so you can still be accepted if you have a poor credit score. With many options available to you, it should find something that will work within your budget. Especially if you use Loanzas free service to find the best loan product for your circumstance
Please remember that you should use short-term loans for emergencies and as a last resort only. Loans are a very expensive way to spend money and should be avoided where possible. If you find yourself taking out back to back short term loans, or using them for frivolous purchases, you should seek help from a financial professional. They'll help you get your finances back on track.
Please make sure that the lender you use is registered in England, Scotland, or Wales and also approved and regulated by the financial conduct authority.