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Short term loans and the alternatives

Looking for a short-term loan? Here's what you need to know.


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If you’re looking to borrow money quickly, short term loan options might be tempting. But there’s a lot to know before you go down this road.

What is a short-term loan?

Generally speaking, a short-term loan is an unsecured loan that enables you to borrow money relatively quickly and repay it in a short period of time. Short-term loans tend to be for lower amounts of money and often charge a very high rate of interest.

What’s the difference between a short-term loan and a payday loan?

There’s a lot of discussion about the difference between a short-term loan and a payday loan and some would argue they’re the same thing.

As a general rule though, a payday loan can be viewed as a type of short-term loan. Typically, payday loans are for smaller amounts of money and shorter periods of time than the average short-term loan. So they tend to be for less than £300 and, like the name suggests, you repay the loan by your next payday.

Short-term loans, on the other hand, tend to offer larger amounts of money than a payday loan and despite the name, they may lend you money for up to a year.

Why get a short-term loan?

If you need money quickly, short-term loans make this process very simple – often lenders will only need a few basic details and will be able to transfer the money to you quickly and directly. This tends to attract people who urgently need a bit of money to see them through to the end of the month to cover rent or bills or make other priority payments.

What is the downside to a short-term loan?

Even though short-term loans lend you money quickly, they tend to ask for it back quickly too. This tight payment deadline, alongside the high rates of interest and other charges, means this can be an expensive and risky way to borrow money.

Lenders typically charge extremely high rates of interest for short term loans - far higher than anything you’d get with a credit card or longer term loan (such as a personal loan).

If you miss a payment on your short term loan you may get hit with these high costs. In this situation it might be tempting to get out another loan to pay off your first loan to avoid growing interest rates or fees. This kind of pattern may keep repeating and before you know it you could find yourself in a lot of debt even though the initial amount you borrowed wasn’t that much.

If you do take out a short-term loan be aware that you could end up facing the prospect of paying back up to double the amount you’ve borrowed in the first place. So think carefully before you take out this kind of loan.

Debt charities and many reputable lenders will warn you against payday loans as they often make your debt worse, not better.

Alternative ways to borrow money on a short-term basis

Here are some ideas for alternative ways to borrow money on a short-term basis. They may not all be free options, but they are all likely to be cheaper than taking out a short-term loan.

Go to a Credit Union

A credit union is a not-for-profit organisation that will allow its members to borrow money at low interest rates.

Ask for an advance on your pay

Consider talking to your employer – would they give you an advance on your salary?

Try getting help from a social fund

If you’re on a low income and you meet the criteria, you may be able to borrow from a social fund.

Think about getting a credit card

If you don’t have a credit card already, now might be the time to apply. This could be an especially good idea if you are able to get a card with a 0% interest offer. If you do already have a card but you’re at your limit, you could ask your bank if they will give you a temporarily increase on your credit limit - but remember to pay this extra loan back in full as soon as you can before you incur additional charges.

Authorised overdraft

If you don’t have an overdraft already, it might be worth asking your bank to see if they will agree to give you one. If you already have one, ask your bank if they will grant you a temporary increase on the amount you’re allowed to borrow. Again you should try and pay this extension back in full as soon as you can.

Borrowing from friends or family members

Although it’s never ideal, you might be able to ask a family member or friend to loan you some money. If you do this, be careful to talk it through properly, come up with a plan for how you’ll pay it back, what you’ll do if you struggle with repayments, and write down what you’ve agreed.

If you're struggling with debt, it might be worth contacting a debt charity such as Step Change before you make any decisions.


Lucy has a wealth of personal finance knowledge, and is one of our in-house experts.