A short term loan can be defined as any form of borrowing that doesn’t involve repayments in multiple installments. As such, any amount borrowed will need to be repaid in its entirety, often within a month.
This kind of borrowing has numerous risks and rewards associated with it. For instance, a careful consumer can use a short term loan to steer away from significant financial issues. However, where people use the ready availability of cash to patch up long term debt problems, the consequences can be dire.
Short term loans are known by a number of different names. You may well have heard of instant loans, same day loans and, of course, payday loans, all of which effectively describe the same form of lending practice. Whilst the format is relatively new, it has quickly grown in popularity as an ever-increasing number of people seek accessible solutions to financial difficulties.
How is it different from a bank loan?
There are numerous differences between short term loans and your conventional personal loan; some are subtle, others very obvious indeed. One of the more eye-catching of these is the rate of interest charged. Often running up to and far beyond 1,000% representative APR, a borrower will often actually pay just 25% in charges. By no means insignificant, but this difference in rates is certainly less monumental than the initial figure perhaps suggests.
In terms of benefits, availability is certainly high up on the list. Whilst this also represents one of the potential dangers, the ability for almost anybody in full-time employment to gain a short term loan makes it a far less strenuous and protracted process than many consumers have become accustomed to.
Borrowing Defined by Speed and Availability
Short term loans have also become synonymous with the Internet. This helps to aid availability and responsiveness from lenders. A borrower can now apply at any time, day or night, be provided with a near instant decision and get the funds transferred swiftly. Therefore much of the red tape and formality of a bank application is discarded, as are the waiting times. Again, this goes some way to explaining their popularity.
Due to the openness of this form of lending, most companies have a strict cap on how much you can borrow. This is another aspect that really sets it apart from a long term loan. Therefore, whilst you might go to a bank to secure a few thousand pounds, you could instead choose a payday loan provider if you’re only seeking a few hundred.
So, in essence, a short term loan is a quick fix to help get you out of a sticky financial situation. You wouldn’t apply for one to buy a car, but you might if your vehicle was stuck in the garage in need of repair. It’s not the cheapest form of borrowing, but the convenience and swiftness it affords has proven to be hugely successful.