All things being equal, short-term loans tend to be more expensive than long-term loans. As well as the fact lenders need to make a profit, with a longer loan you are paying interest over a longer period of time, therefore, a lender can afford to offer a lower rate and still make a good return.
Unfortunately, for those with chequered credit history, the rates can be significantly higher. When investigating short-term loans, you will also notice the potential for additional fees, such as a setup fee.
These can have a significant impact on the APR which we will cover in the next section. On average, short-term loans tend to be anything between 24 hours up to 12 months.
Despite the government clamping down on excessive interest rates, this is still a very active and a very competitive area of the lending market.
Headline Interest Rate and APR (Annual Percentage Rate)
If you have a bad credit history, then you would likely attract higher than average interest rates simply because of the perceived risk. When comparing different types of short-term loans, you must focus on the APR as opposed to the headline interest rate.
The headline interest rate is the basic rate of interest charged on the loan principal. The APR includes all additional costs and gives you a fairer picture of the real rate you would be paying.
All loans should provide an APR which allows you to compare and contrast across a range of different potential lenders.
Remember, a low headline interest rate is all good and well, but you need to know the APR before making a decision.
Reasons for a Short-Term Loan
There are many reasons why consumers may require short term funding, with the idea of repaying the loan as soon as possible to avoid excessive interest charges.
Unfortunately, a relatively short time span can often be extended at significant cost.
Some of the more common reasons for short-term bad credit loans include:-
Many people struggle to cover the cost of living even when in employment. Therefore, it is no surprise that many people turn to short-term loans when made redundant.
That is not to suggest those looking at short-term loans will not find employment relatively quickly, but in troubled economic times, it can be difficult.
A holiday in the sun can help to recharge your batteries and perhaps take you away from difficult times. As a consequence, many people look towards short-term loans to pay for holidays which they can’t really afford at the time.
While the majority will have some kind of payback plan in place, before even applying for the loan, these can often be blown off course as unexpected expenses arise.
Whether it is attending a family wedding, an anniversary or an event at work, many people are drawn towards short-term loans to save embarrassment.
While many of those applying for short-term loans would probably be able to lend money from friends and family, using the services of a professional lender can save any embarrassment.
The problem with using short-term loans (especially where you have a bad credit history) to cover everyday bills is the fact that with cash flow so tight very often people struggle to cover the repayments.
What started as a relatively small loan can very quickly increase when additional funds are required, or the original debt needs refinancing.
Using short-term loans to cover mortgage payments, with the idea of paying off the loan relatively quickly on their next payday, can be seen as a short-term solution by many people.
If you take a step back and look at the situation from a distance, this could be the start of a very challenging period.
Also, if you have equity in your property, and your debts are piling up, it may be worth looking at releasing some of this to clear the decks.
While in the UK we have the NHS, sometimes the waiting times for time-critical medical (or even cosmetic) treatment can be relatively long.
As a consequence, some people will look to go private with their need for treatment superseding their challenging financial situation and potential repayment difficulties.
The fact that the majority of bank overdrafts can be recalled at any time can be a challenge.
If for example, your bank detected less money being paid into your account, then they may begin to become concerned about your ability to repay your overdraft.
They may decide to recall your overdraft, forcing you to repay the funds using monies from elsewhere.
Unexpected costs can include anything from car repairs to your washing machine breaking down, treatment for your pet or a family member struggling to get by.
Sometimes it can be difficult to get your hands on the funds required, forcing many to look at potentially expensive short-term loans.
Different Types of Short-Term Bad Credit Loans
We will now take a look at the various options available for those with bad credit ratings looking to secure short-term finance. When considering each of these options, it is worth reminding ourselves of the very basic formula, the risk/reward ratio.
The higher the perceived risk in lending to a client, the higher the interest rate, it really is as simple as that.
So, if you have a bad credit history as a consequence of missed payments, bankruptcy, etc. then you should expect to pay higher than average interest rates on short-term finance (any type of finance).
No Guarantor Loans
There are numerous types of no guarantor loans which we will cover in this article, but as the name suggest, the individual borrowing the funds is “going it alone”.
For those with a relatively healthy credit rating, this should not be a problem, but those with a chequered credit history may find it difficult if not impossible.
In order to prove you could keep to a repayment plan, you may need to significantly revise your everyday spending and possibly look to raise funds via short to medium-term asset sales.
As this type of client is generally deemed relatively risky, they would need to undertake an affordability test AND present a sensible repayment plan.
Some of the more common types of no guarantor loans include:-
- Personal unsecured loans
- Payday loans
- Peer to peer loans
- Logbook loans
Bad Credit Loans (Unsecured and Secured)
When it comes to bad credit loans, there is no escaping the fact you would likely be charged an APR anywhere from 20% to in excess of 50%.
Many of the “relatively low” interest rates available to those with bad credit histories are as a consequence of assets they can use as collateral, such as their home.
Where there is limited or no security against a short-term bad credit loan, the interest rate can be extremely high.
There is a common misconception that because of the relatively high interest charged on bad credit short-term loans, there is no affordability test. In reality, it would be commercial suicide not to consider the borrower’s finances and broader scenario.
Even though those lenders offering short-term finance to those with bad credit histories are seen as “risk-takers”, this is not necessarily the case.
Not all applications for this type of finance will be successful, and it pays to approach the lenders with a solid, sensible and affordable repayment plan.
While there is a natural tendency to try and pay back short-term finance as quickly as possible, you need to be realistic.
As a consequence, many lenders may recommend an extended-term compared to that which you had in mind. Obviously, this would incur greater interest charges, but it would also have a positive impact on your short-term cash flow.
In a perfect world, those with short-term cash flow problems would simply ring their bank, request an overdraft, and the funds would be available within just a matter of hours.
Unfortunately, it is not always as simple as this and where your credit rating has begun to deteriorate you may struggle to obtain an overdraft. It’s not impossible, but the chances are that funds will either be very limited or the term relatively short.
There’s also the chance that you may incur higher than average interest rates on your overdraft. When you bear in mind the recent changes to overdraft interest rates, it could be challenging to repay even on a relatively short timescale.
For the moment, let’s put aside the fact that all of your financial transactions, including any missed payments, would be added to your credit reference file.
If you are requesting an overdraft from your main bank, then they will be able to review the health of your account with them. As a consequence, those with deteriorating finances may need to look elsewhere for their short-term funds.
While the payday loans market we see before us today only really emerged at the turn of the century, this type of lending network goes back centuries.
Those with funds would lend to those with short-term cash flow issues and charge interest – simple business and often very lucrative.
In recent times the industry has come under huge pressure as a consequence of:-
- Eye-watering interest charges
- Excessive additional charges
- Huge missed payment penalties
- Affordability issues
- Aggressive debt recovery tactics
- Excessive marketing of additional funding
The idea of a payday loan is relatively simple; you are struggling until your next payday, you have bills to pay, and you borrow money on a short-term basis. To give a degree of balance, APR statistics in the hundreds of per cent are not relevant for the majority of people.
The average person will lend no more than £100 over a 30 day period with a definitive repayment plan in place. Obviously, others who are in a worse situation might look to extend the additional loan/refinance, which can lead to serious financial consequences.
In the early days, the industry seemed to fall between two stools, and there was no direct regulator to address the uncontrolled growth.
However, the Financial Conduct Authority took control back in 2013/14 undertaking a major review which led to huge changes.
As a consequence:-
- The daily interest on the principal loan cannot exceed 0.8%
- Fixed default fees are capped at £15
- The total cost of a loan is capped at 100% (fees and interest cannot exceed the principal loan level)
In recent times we have seen a number of the major players in the payday loan industry fall by the wayside as their reputations were dismantled.
Many people use this particular short-term loan system and have no issues with repayments. If you go into these arrangements with your eyes wide open and a repayment plan in place they can be very useful.
However, where you are perhaps “robbing Peter to pay Paul” this can sometimes lead to huge financial challenges.
No Job Loans
On the surface, it seems sensible to assume that those with no employment income will at best struggle to obtain loans. Where they have a chequered credit history, this can make a challenging situation even more difficult.
While employment income is the more common source of repayment funding, this is not always the case.
For example, you may be able to apply for a no job loan if you receive:-
- Investment income
- Unemployment benefit
- State pension
- Private pension
- Disability income
- Child support
You would obviously need to prove that the income you receive is enough to cover your living expenses and repayments.
Those who have perhaps agreed to a settlement for a personal injury claim or even a PPI claim, and are simply awaiting receipt of the funds, may also be able to obtain funding even if they are unemployed.
It is perhaps a little misleading, the focus on the “no job” reference when we should really look at other income streams, total income and living expenses.
Getting a Loan While on Universal Credit
When looking to secure loan finance while claiming universal credit, you may find it difficult.
As a borrower, you would need to demonstrate that the universal credit income, together with other income streams, would be enough to cover your cost of living (including any dependents) and loan repayments.
Unfortunately, those with a chequered credit history will likely be susceptible to higher interest rates because of the perceived high risk.
That said; it would depend upon the buffer between universal credit income (guaranteed by the government) and cost of living.
It is also worth noting that those with short-term cash flow issues can apply for what is known as a “budgeting advance” as part of the universal credit system.
In effect, this means that the government will make advance payments of future universal credit income. Those who successfully apply for “budgeting advance” loans will have the repayments taken from their future universal credit payments.
Generally, the repayment period is long-term as the authorities try to keep the actual repayments as low as possible.
As this is all done in-house as part of the benefits system, the loan can be arranged fairly quickly.
Getting a Loan With a CCJ
When you consider that a County Court Judgement (CCJ) is effectively an order to repay an outstanding debt, this obviously has an impact on your credit reference file.
As a consequence, if you’re looking to secure short-term funding, there is every chance you may be rejected or at best faced with relatively high-interest rates.
However, there are a number of scenarios where the impact of a CCJ may not be as damaging as first thought.
Some of the scenarios which may offer a little more hope when looking to secure short-term funding include:-
- Proving to a potential lender that the CCJ was not your fault
- Evidence that the outstanding debt has been repaid
- Providing proof that you are abiding by the repayment plan
In the majority of cases, it will be “an outside chance” that a potential lender would listen and consider potential extenuating circumstances.
That said; if you have the opportunity to discuss your situation directly with a potential lender, then you should take it up.
If they listen, you may be surprised at what they offer you!
While logbook loans are not necessarily the most topical of subjects, there are an extremely useful means of securing short-term finance by using your vehicle as collateral.
Some of the more common vehicles used include:-
Upon agreement of a logbook loan, ownership of the vehicle would be transferred to the lender as collateral against the funds made available.
The idea is simple if you keep up with the repayments then when the principal and interest has been repaid, the vehicle will be returned to you.
In the event that you fail to abide by the repayment plan the vehicle will be sold, funds owed taken by the lender and any surplus returned to you.
One of the benefits of a logbook loan is the fact that during the period of the loan, you can still use the vehicle. You would obviously be responsible for insurance, MOTs, etc., as you would when you owned the vehicle.
When you consider that logbook loans can take motorhomes, HGVs and boats as collateral, they can release significant capital sometimes into the tens of thousands of pounds.
As well as the value of the vehicle, the decision to grant a logbook loan would also consider your credit history and ability to pay. So, just because you have a chequered credit history does not necessarily mean you would be refused a logbook loan.
As with any lending transaction which includes collateral, the bigger the buffer between the amount borrowed, and the realistic value of the asset, the lower the interest rate (APR).
Yes, again, this comes down to the very basic formula, the risk/reward ratio.
Budgeting for Short-Term Debt
Many people struggling to cover bills and expenses in the short-term may have no option but to reach out for short-term loan facilities. We have covered a number of the more common options available to those with bad credit ratings and challenging short-term cash flow.
There is often a knee-jerk reaction to go for the shortest repayment period, which will include the highest level of repayments. Even though you may think you are giving the right impression to a potential lender, this might not be the case.
If after running an affordability test, it becomes obvious that you would not be able to afford the proposed short-term repayments, you may be refused credit.
Where the result of an affordability test is borderline, the fact that you planned to repay the funds as quickly as possible is not always a positive factor. Lenders would prefer that you took a realistic approach rather than a knee-jerk reaction to repay the money as soon as possible.
In some cases, cash flow constraints in the short-term may force you to refinance or look elsewhere for additional credit.
So, be realistic, if anything is overly cautious as opposed to excessively optimistic.
Refinancing Short-Term Debt
Short-term debt is often defined as anything from one day to one year, but there is no definition set in stone. If you are able to improve your credit rating in the short-term, then you may have the opportunity to refinance on an improved rate.
This is not necessarily a bad thing for lenders, who would obviously receive less interest from you because in theory the repayments are more secure and the loan more likely to be repaid in full.
In some cases, where you have seen a short-term improvement in your credit rating, you may be able to look at more traditional lenders as opposed to those specialising in short-term loans for those with chequered credit histories.
This would likely lead to a significant reduction in interest charged, thereby improving your short-term cash flow, giving you a tighter grip on your finances and hopefully allow you to move to a much firmer financial footing.
Whether looking for short-term finance, with a chequered credit history, while unemployed, perhaps claiming universal credit or struggling with short-term cash flow, there are options.
The loan interest rate/APR charged for those with chequered credit histories will depend on a number of factors such as their income, debts, assets and ultimately their ability to cover repayments.
There are also various options through the UK government, and some charities will be able to assist those suffering hardship with very limited options.
If you find yourself in a difficult situation with regards to your credit history and short-term cash flow, it is imperative that you take advice.
There may be a number of different options to consider for your particular scenario, with potentially huge variations in interest and charges.
Taking professional financial advice will ensure you make the right choice for your situation; you are fully aware of the consequences and any potential refinancing options further down the line.
There is certainly a lot to consider and a lot to take in!
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