*This is a collaborative post.


Short term loans can be confusing so this guide breaks down the pros and cons of this kind of loan. I’ve teamed up with cashasap.co.uk, who are a short term loan direct lender in the UK, to help you know when you might consider getting a loan and when you should look at other financial options. 

What is a Short Term Loan?

A short term loan is any form of loan that lasts for a short period of time. It is an umbrella term that describes any loan that is repaid in full within a year, but in reality, it most commonly refers to instalment or payday loans. These usually last up to three months (for instalment loans) or up to 36 days (for payday loans), but it does vary between different lenders.


Payday and Instalment

There are two types of short term loans: payday loans and instalment loans. In themselves each of these have different pros and cons.

Payday loans are designed to let you borrow money and pay it back after your next payday. You pay back the amount you owe in one go by the date agreed with the lender. Their advantage over instalment loans is that they are often cheaper because you’re borrowing money for a shorter period.

Instalment loans allow you to borrow money and pay it back in a few different repayments. Its advantage over payday loans is obvious; you can spread the cost of repayments. It does tend to be a bit more expensive so is best when you know you’ll need to spread costs in order to manage your finances.

The Pros and Cons of Short Term Loans

Short term loans can be extremely helpful for some people and in some situations, but if you don’t actually need one then they can be very unhelpful!

Con: Expensive

Short term loans have the highest interest rates of any loans, which does mean they’re an expensive way to borrow money. The APR is often extremely high, but it’s worth noting that APR is calculated as a theoretical annual rate, so the cost to borrow for a year. In the case of short term loans, you’re borrowing for a very short period of time, so a high APR rate doesn’t necessarily mean you’re going to be paying back extreme amounts.

Borrowing £100, for example, as a payday loan lasting 10 days at an APR of about 1500%, might mean paying back just under £110. 

Different direct lenders will offer different prices and rates so it’s a good idea to use a price comparison tool. As with most loans, if you have a poor credit history, you might have to pay more than someone with a good credit history.

Pro: Quick Cash

This is by far the biggest advantage of short term loans, both payday and instalment. You can apply to borrow money and receive it the same day through a bank transfer. It will depend on the lender as to how much you can borrow, but it’s often up to about £500, with most lenders upping this limit if you’ve borrowed reliably from them before.

You can also specify how much you want to borrow to the nearest pound. If you need precisely £118 to pay for a repair on your car, for example, you can get the exact amount so you only pay back what you use.

Con: Show On Your Credit File

All loan applications (whether they’re successful or not) show on your credit file, including short term loans. This is because the loan company will have to run what’s called a ‘hard search’ on your file, which is always recorded.

This means that the fact you applied for a short term loan will show up on your credit file. For a lot of people, this is okay provided that you then pay it back in full and on time. However, if you apply for multiple loans within a short period of time, it can be a sign of financial difficulty and poor money management. When this is seen on your credit file, it can mean lenders are less likely to offer you a loan.

For some lenders, any kind of short term loan on your credit file is a red flag (up to a certain number of years after the event). The main thing this affects is getting a mortgage. If you apply for a short term loan it indicates to banks or other mortgage providers that you have been in financial difficulty and therefore wouldn’t be a good candidate for such a large and long-term loan.

It’s worth noting that lenders and loan providers recognise how long ago it was that your applied for a loan. If you’re looking to get a mortgage a good few years after your loan, then you shouldn’t have any problems.

Pro: More Easily Accessible

The application process for a payday or instalment loan is much more simple than with larger loans and it doesn’t take weeks of processing before it’s approved.

It can also be easier to get a short term loan than other types of loans if you have a thin credit history or a poor credit file. This isn’t always the case, as it will depend highly on how bad your credit history is, but lenders are often more lenient with short term loans than with bigger loans like a mortgage or car payment plans.

When Might You Consider A Loan?

With all this in mind, when might you actually consider getting a short term loan? The key thing is to only get one when you really need one. If you could scrape by until your next payday without, or shift around some other elements of your budget, then it’s a better idea to try that first.

You should get a short term loan only to pay for something that’s really necessary. You shouldn’t use them for luxuries or things that can wait until after your next payday, like a new TV, a meal out or a gift for someone.

On the other hand, if you need money quickly to cover a sudden cost that you couldn’t budget for, like an emergency plumber or a repair on your car which you use to get to work, then a short term loan could be the right answer for you.

Remember that any kind of loan can lead to serious financial problems if it’s not well managed or paid back in time. If you’re not sure that you can pay the loan back by the repayment date, then don’t get one. Seek financial help from a charity or government service, like the Money Advice Service.