Short Term Loans for Bad Credit: Should I Get One?

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What are short term loans?

Short term loans are typically loans for relatively small amounts that you repay in instalments over a shorter period of time.

You usually have between one to 12 months to pay back a short term loan, whereas the minimum loan term for a standard personal loan is often 12 months or more.

Because of the smaller amounts and shorter terms involved, there may be less involved when applying for a short term loan and receiving the money than with other personal loans.

This means that you might consider a short term loan to cover unexpected or emergency expenses, for example.

But because short term lenders consider borrowers who have a poor or limited credit history, they charge higher interest rates when compared with standard personal loans. This is to cover the increased risk that borrowers may default on their repayments.

Are short term loans the same as payday loans?

You might hear people use the phrases ‘short term loan’ and ‘payday loan’ interchangeably.

Both refer to relatively expensive loans for small amounts that you agree to repay quickly. However, payday loans are designed to tide you over until you next get paid, when you make one repayment (with interest) to settle your debt.

A short term loan, on the other hand, works in the same way as other loans, whereby you spread your repayments over monthly instalments.

» MORE: What is a payday loan?

Can you get short term loans for bad credit?

Finding short term loans with a bad credit history is possible. Short-term loan providers usually consider people with a poor or limited credit history who might struggle to get cheaper credit elsewhere.

However, lenders are still required by the regulator, the Financial Conduct Authority (FCA), to check that borrowers can afford the loan repayments. The FCA has also told lenders that they should not use phrases like ‘no credit check loans’ when advertising their products.

Typically most lenders will perform a hard credit check when you apply for a loan, which will show up on your credit report. This check gives the lender information about how you’ve managed financial products in the past.

Lenders can also take other information into account when deciding whether to give you a loan, such as your regular income and expenditure.

A lender may be acting irresponsibly if it doesn’t gather enough information to work out whether you can repay the loan.

Keep in mind that missing repayments on a short term loan will harm your credit file.

Factors like this mean that short term loans are unlikely to be the right choice if you have a history of missing repayments, or you have other debt that you’re struggling to clear.

» MORE: Best loans for bad credit

How much do short term loans cost?

Short term loans can be expensive, and if you already have bad credit, lenders may offer a higher rate of interest to help mitigate the risk of you not repaying the loan.

Lenders are required by the FCA to display a representative Annual Percentage Rate (APR) when advertising their products, which shows you the cost of borrowing over a year.

However, short term loans are often taken out over less than a year, so the representative APR can be very high because the costs are multiplied to give the average cost for a year.

The FCA has capped the costs of high-cost short term credit – where the APR is 100% or more and the term is less than 12 months – making sure that you:

never repay more in fees and interest than 100% of what you borrowed
don’t pay more than 0.8% of the amount borrowed a day in interest and fees
don’t pay more than £15 in fees for default

While these caps limit the total cost of the loan, it’s still helpful to use the representative APR on short term loans to compare costs.

The higher APR shows you that short term loans are a very expensive way to borrow and not appropriate if you have longer-term borrowing needs. Keeping up with repayments and settling the debt within the agreed term is vital.

If you don’t think that you can keep up with the repayments, or would prefer longer to pay back the loan, you should consider alternatives.

Is a short term loan right for you?

You can take these steps when considering whether to apply for a short term loan.

Check your credit score. Your credit score indicates the type of credit that you can apply for and the likelihood of being accepted. It should give you an idea of whether you can apply for an alternative, potentially cheaper form of credit, such as a 0% interest credit card. Some online services allow you to get a report for free, giving you insights on improving your credit score.
Check your budget. A budget can help you work out if a short term loan is absolutely necessary, and whether you can afford the repayments.
Consider whether the need to plug gaps is a common problem. After creating a budget and checking your previous account statements, you might find that you’re constantly applying for credit to cover costs. If you already rely on credit, you risk getting into a cycle of debt, where loan repayments stack up and you can’t keep up with them. If this sounds familiar, a short term loan probably isn’t the solution.
Speak to a free debt charity such as StepChange or National Debtline. These services can help you budget and come up with a plan to clear any existing debt. They can also help you work out whether you’re receiving all the benefits and other income support you’re eligible for.

Alternatives to short term loans

Credit unions

If you don’t have the best credit score and only need to borrow a small amount, a credit union may be a cheaper option than a short term loan. There’s a cap on the interest they can charge, and they won’t usually charge fees for paying your loan back early.

However, you need to join a credit union first, and there may be some initial membership requirements before you can apply for a loan.

Credit cards

A 0% interest credit card should be cheaper than a short term loan. They come with an introductory period that allows you to spread the cost of a purchase over several months without paying interest.

You’re more likely to be approved for a credit card with a 0% period if you have a good credit score, because it gives lenders more confidence that you will repay the money. Lenders may still accept people with poorer scores, but they could receive a shorter 0% period and a lower credit limit.

You must make at least the minimum monthly payment on time – and ideally, you should pay enough each month to clear your balance by the end of the interest-free period, as once this period ends you will likely revert to the lender’s standard rate.

More typical credit cards that don’t have an introductory 0% period could also be cheaper than short term loans. Credit card interest rates are often lower than short term loans, with lenders calculating APR based on how much it would cost to borrow £1,200 and repay it in instalments over a year.

Lenders are more likely to reserve their best rates for those with better credit scores. You need to make sure that you pay far more than the minimum payment each month to clear the debt within your preferred time frame otherwise credit cards end up being costly.

Keeping up with credit card repayments may improve your credit score. However, missing repayments will impact it negatively.

Many card providers allow you to check your eligibility for a credit card without affecting your credit score. You will usually need to provide some basic information such as your address history, annual income and employment status. The lender will use this information to do a soft credit check, which help it decide how likely it is that your application will be successful. Soft credit checks don’t show up when companies look at your credit file.

When you apply, the credit card provider will do a hard credit check. This is a thorough examination of your credit file, which shows up on your report. Too many hard credit checks in a short period of time can harm your credit score.

» MORE: Should I get a credit card?

Arranged overdrafts

Check with your bank to see whether they’ll offer you an arranged overdraft. Overdrafts should also only be used for the short term, to cover unexpected costs – but the interest rates may be cheaper than a short term loan.

But if you’re constantly in your overdraft the fees can start racking up, so it’s important to monitor your balance and budget effectively.

Savings

It’s cheaper to use any savings to cover unexpected costs than a short term loan, because the interest you earn on savings is very unlikely to be more than the interest you pay out for credit.

It’s a good idea to save enough to cover at least three months of expenses in an emergency. When you have an emergency fund, it reduces the need to rely on short term credit.

Personal loan

You’ll need to check whether you’re eligible, but a standard personal loan may be cheaper than a short term loan. The repayments can be more affordable because they’re spread out over a longer loan term.

However, because of the longer term you’ll have to work out whether it will cost more in interest and fees overall. Many lenders have loan calculators that you can use to see the total cost of your loan, you can also use our personal loan calculator.

If you were considering a short term loan initially, you may want to repay your personal loan early, and there are usually charges for doing this.

While you can often check your eligibility for a loan without affecting your credit score, lenders will usually conduct a hard credit check when you apply. Too many hard credit checks over a short time frame can impact your credit score negatively.

» MORE: How to get a loan

Friends and family

Finally, friends and family may be willing to help you out in an emergency. You won’t have to worry about your credit score and it’s possible that they won’t ask you to pay much interest, if any at all.

But there are pitfalls to borrowing from friends and family. Drawing up a contract or repayment agreement can help you avoid them.

Where to get free debt advice

If you’re struggling with debt and are looking for a loan to make ends meet, you might want to seek free debt help from a charity such as:

These charities can help with things like budgeting and coming up with a plan to deal with your debt. They could also help you apply for debt respite schemes such as the ‘Breathing Space’ scheme in England and Wales and the Debt Arrangement scheme in Scotland. There isn’t currently an equivalent scheme in Northern Ireland.

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