Budgeting for unforeseen expenses can be challenging. It may not be feasible to withdraw money from savings. In addition, we do not have an abundance of savings in the current economy to get by.
You can use a small loan to cover these expenses that arise unexpectedly in these circumstances. A short-term loan can be helpful for minor ventures – you can pay the cost over a fixed period of time through small monthly instalments.
Find out the pros and cons of short-term loans. Can a short term loan help you improve your credit score? Learn more below.
What are short term loans?
Generally, short-term loans are personal loans to use for minor repairs, such as fixing an appliance, doing a small home improvement, or paying medical bills. There are many lenders that offer short-term loans of up to £2000 that can be repaid over a fixed period in affordable monthly instalment.
Borrowers with a low credit score may be able to get short term loans from some lenders, but the rates may be higher. Credit scores help lenders assess your ability to repay. You will be more likely to obtain credit at competitive interest rates if your credit score is high. Conversely, poor credit scores for lenders pose a risk. As a result, they set a higher interest rate.
A short term loan is typically disbursed quickly. Your loan money can be used at your discretion, but you need to be responsible for it. It is possible to build your credit rating or improve it with a short-term loan. You can improve your credit score by making timely repayments. As you pay down your loan, you will move up the credit ladder.
Repayment history is important to your credit score since lenders report it to credit bureaus regularly. Each timely repayment can boost your credit score, while a missed repayment can lower your score by 80 points. In addition, if you default on your loan, you could face a CCJ against you that would cost you 250 points in your credit rating. CCJs stay on your credit file for six years, making it more difficult to secure credit and hindering your success.
Can I borrow short term loans for bad credit?
Low credit scores make it challenging to get a loan. Despite being able to apply for a small loan with bad credit, you may not qualify for competitive rates and terms. Paying on time for your household bills and outstanding debts would be a good way to qualify for lower interest rates.
If you need an urgent loan and are running out of time, visit 786 Loans. 786 Loans is an FCA-approved broker in the UK that allows you to compare loans from FCA-authorized lenders in the UK. Our loan offers are tailored to meet your specific needs.
Should I consider a short term business loan?
It can be hard to remain successful in such a highly competitive market. In addition to daily operational costs, a business venture may require investments from time to time – inventory management, purchases of advanced equipment, and financing of technical equipment. Spending too much money on these expenses may not be a wise decision.
It is possible to take out an unsecured or a secured small business loan, depending on the success of your business. Since unsecured business loans do not require collateral security, some people find them more affordable. Owners or directors of the business are required to personally guarantee repayment.
To the contrary, you can borrow a secured business loan by pledging your company’s assets as security. You can also secure this loan with collateral like business equipment or property. In the event of a default, your lender may repossess and, possibly, sell these assets to recoup their loss. Although, with a secured loan, you may have the option of borrowing a much larger sum of money.
Pros and cons of borrowing short term loans
- Flexibility and versatility: The purpose of short term loans is not stipulated, unlike mortgages and auto loans. Among many possible uses for a personal loan, you can use it to repair your house, pay off medical bills, fix your car, and more.
- Lower interest rates and higher borrowing limits: You can borrow a sizeable amount of funds at lower interest rates with short term loans than most credit cards with a good credit score.
- No collateral requirement: You don’t need to secure an asset in order to obtain an unsecured personal loan, which makes them more widely available.
- Easier to manage: Taking out a short-term loan allows you to split your expenses into affordable monthly payments, which are easier to manage with monthly household expenses.
- Interest rates can be higher than alternatives: The interest rates for short term loans tend to be higher than those for the majority of homeowner loans secured by property, such as an HELOC or home equity loan. A secured loan can, however, harm your property if you default.
- Fees and penalties can be high: Additional fees are sometimes charged by personal loan lenders, which add to the APR. Lenders charge different amounts for early repayment, missed repayments, and so on.
- Higher payments than credit cards: It is usually possible to pay off credit card balances at any time because balances are usually small. Personal loans, on the other hand, operate on a monthly repayment schedule, so borrowers must adhere to it and pay back their loans within the designated time frame. Despite the promotional (0% interest) period, credit cards can incur high-interest balances if arrears aren’t paid.
With affordable monthly repayments, short-term loans can be a useful financial tool for coping with more minor expenses. Interest is charged over the entire period of the loan. As a result, you should pay off your loan as soon as possible.