There are few loans more vilified than short-term loan. Not only are they expensive to borrow any amount of money, these loans may prey on the insecure. It is never wise to take out a short-term loan if you are unsure if you can pay it all back on time. When you are not able to, fees and interest can spiral out of control. Although short-term loans are known for their high interest and fees, if you understand them you can make sure to get out of its grip before the interest and fees go sky high.
Short-term Loans in the UK
When you take out a short-term loan, money is directly funded to your bank account, sometimes on the same day, and the fees can be taken out the same way. According to MoneyPug, a site used to compare the best online loans, while you may have up to a year to repay the money, some lenders allow you to choose the period of repayment.
Fees and Interest
In the United Kingdom, the cost of repaying a short-term loan is limited by the law, under the rules of the Financial Conduct Authority (FCA). Though the rules limit interest and fees, you will still rack up hefty costs. If you don’t pay the money back on time, you will be charged fees that accrue interest. One good thing is that the total amount you pay back cannot exceed twice the amount you borrowed.
There is also the option to do recurring payments. This tactic can be helpful, but also increasingly risky. If you don’t have enough money in your account, you could be charged for overdraft. Furthermore, you may be charged for fees you didn’t realize you had until you are charged with them.
The Cycle of Short-term Loans
If you ever have a problem repaying your loan, the lender may ask if you want an extension known as a rollover. They may even renew your loan with your consent obtained by the fine print on the contract you signed. It is crucial to pay attention to all of the copy on the contract to avoid this. Still, loan companies are limited to how many times they can renew. They must also give you the information each time it rolls over. The information should include contact details for free debt advisors. Agreeing to a loan rollover may seem like the only option at the time, but it is nearly always a bad idea.
Alternatives to Short-term Loans
Considering all of this, there’s no reason you should get a short-term loan before weighing your other options. For one, if you are struggling to pay for the essentials—food, clothes, and heat—there are many welfare options to help you. Non-essential items like travel and fine clothing should be saved for.
If, for example, you have an emergency, borrowing money from family and friends is the best alternative. Setting up a payment plan and putting your agreement in writing can also assuage any worries about you borrowing. If running out of money before you get paid is the problem, it is always worth asking your employer for an advance on your salary. Talking to your electric company, mechanic, or hospital and asking them to delay payment is another way to avoid loans.
Using a credit card or borrowing from a credit union are both expensive, yet they are still cheaper than many short-term loans. Paying off your card immediately can actually be beneficial, raising your credit score and leading to new financial opportunities. Finally, there are both secured and unsecured loan options that may be more beneficial depending on your situation. The point is there are other options. But if you end up getting a short-term loan, make sure the interest rate and fees are low.