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Definition of a Short Term Loan

Definition of a Short Term Loan
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Some aspects of a short term loan are obvious. They are repaid over less time than a long term loan, for instance! But what other factors make short term loans different from longer term loans? We’ve explored these factors a little more below. But the simple answer is that for the most part, both types of loan are viewed the same way by lenders and financial companies.

Can Everyone Define Short Term Loan?

Defining a short term loan is actually more difficult than you might think. For example, what makes a ‘short term loan’ short term? A payday loan is a type of short term loan, which can be repaid after a few days. But instalment loans, which are also in the same category, can be paid back over the course of several months, or even years.

Perhaps the biggest difference between short and long term loans is ironically not the length, but the amount you borrow. Longer term loans include things like mortgages, which are some of the biggest loans you can get, and large bank loans. Short term loans tend to be for smaller amounts – between a few hundred and thousand pounds.

And on your credit file, most lenders view short term loans and longer loans the same way. They are only concerned with how you manage your money, and are making your due repayments on time, not with the type of loan you have taken out.

Short Term Loan and Long Term Loan Options

While there’s no easy way to differentiate between short term and long term loans in general, the types of loans available in each category are more easily defined. So what options are available, and why might people choose them?

Long Term Loan Options

  • Mortgages: A mortgage is a type of secured loan. This means that the lender has  collateral should you be unable to repay. With a mortgage, your home could be repossessed if you were to default on the loan. The benefit of a mortgage though, is that you can gain equity in your property over time. That way, you can hopefully earn back the interest you pay on the mortgage.
  • Personal Loans: Personal loans can often be borrowed from traditional lenders, such as banks. They’re also known as unsecured loans. This means that you don’t need collateral to take them out. Generally, personal loans are between £5,000 and £25,000, and are borrowed over the course of around two to five years.
  • Peer-to Peer Loans: Instead of borrowing money from a financial institution, like a bank, with a peer-to-peer loan, you would borrow from an individual or group of people. Interest rates are variable, and will depend on your credit score.
  • Debt Consolidation Loans: With a debt consolidation loan, you can pay off lots of smaller debts, and just have the one loan repayment. For some people, this can work out to be a cheaper option. This is because you’ll only be paying one rate of interest rather than several.

Short Term Loan Options

  • Instalment Loans: An instalment loan is similar to a personal loan, but the loan amounts tend to be lower. Generally they are between around £300 and £5000. You would make monthly repayments towards the loan, usually over a few months or years.
  • Payday Loans: A payday loan is repaid in one lump sum – typically on your next payday. As you don’t spread the instalments over multiple payments, the loan value is generally lower than an instalment loan.
  • Guarantor Loans: Like an instalment loan, you would pay back a guarantor loan over several monthly repayments. The difference is that you need a guarantor – someone who agrees to make the due payments if you are not able to pay them. It can be difficult to find someone you trust to be your guarantor. But if they have a good credit history, you have a good chance of being approved for a guarantor loan.
  • Bad Credit Loans: If you have a poor credit rating, a bad credit loan can help you gain access to credit that you may have struggled to get elsewhere. The interest rates for bad credit loans are typically higher than for other short term loans though, as the lender is taking more of a risk in lending to you.

Key Points

  • There is no easy way to differentiate short term and long term loans. Often it’s about the loan value rather than length of the loan
  • There are various types of both long and short term loans, which can be borrowed for different reasons
  • Short term loans are generally more flexible and accessible than long term loans, and are often aimed at those with a poor credit history

Advantages of Short Term Loans

There are two main advantages to short term loans over long term loans – they are more accessible, and more flexible. In terms of flexibility, unlike a long term loan, where there is usually a high minimum limit of what you can borrow, and often early repayment fees, a short term loan allows you to choose exactly how much you want to borrow. You can also decide how long you want to borrow for, and the repayment dates. And they almost never charge a fee for early repayment.

When it comes to accessibility and being accepted for a short term loan, for the most part, your credit score is less important than factors like your employment history and your monthly expenditure. With long term loans, as the loan amounts are usually higher, the risk can be higher for the lender. They therefore put a lot of weight on your credit file and whether you have a near spotless history of paying loans and other forms of credit back on time.

Bad Credit Loans

Short term lenders understand that sometimes things can happen outside of your control. You may lose your job, or have to take a few weeks off from work due to illness. In these types of circumstances, you may fall behind in your credit commitments. And as such details are recorded on your credit report for up to six years, one period of financial difficulty can impact your chances of taking out loans for a considerable amount of time.

Short term lenders try not to focus on your financial history, but your financial present. As long as you’re able to make the due repayments without putting yourself into any difficulty, you should be able to take out a short term loan.

So if you’re looking for a short term loan to cover an unexpected cost, My Financial Broker can help! We can put you in touch with the best lender to suit your needs, and most likely to approve your loan application. Our services are completely free too – simply complete our short and simple application for a no obligation quote!

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