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Representative APR from 45.3% - 1575%

Hidden charges and fees are, understandably, a big concern for those looking to borrow money during personal financial difficulties.

Say, for example, you need £1,000 to fix your car or else you won’t be able to get to work all week. A short-term loan might be able to get you out of a tricky situation like this.

But not knowing:

  • How much you’ll be asked to pay back each month,
  • How long you will be obliged to pay it for, or
  • If any further costs will be put on your bill

….causes a lot of unnecessary stress or may even put you off the idea altogether.

Knowing what your monthly repayment will be and knowing that the interest rate on a loan is fixed offer comfort to lenders as it removes a lack of predictability.

In this article, Moneypod considers whether short term loans offer borrowers low interest rates.

 

What is APR?

The Annual Percentage Rate (APR) is the percentage of interest owed on a loan if you were to borrow the money for one year. If you borrowed £100 at 40% APR for one year, you’d have to pay back the loan plus £40.

APR is advertised at what can seem to be terrifying rates. You may have seen short-term loans offered at something like ‘1295.5% APR representative’. This makes things very confusing for a lot of people because the Financial Conduct Authority’s (FCA) approved rate of daily interest is capped at 0.8%.

APR describes the cost of a loan if it was borrowed at a rate over the course of a year. Legally, all loans, even those lasting a month, must show the APR when a company advertises its loan products.

Why? It’s the FCA’s approved way of describing interest rates even though the loan market has moved on since the 1970s when the requirement to use APR was first introduced.

 

What is a flat interest rate?

In simple terms, flat rate interest is the percentage of interest that’s charged on the initial loan amount for each year in the payment period.

For example, let’s say you borrowed £10,000 at a flat interest rate of 5% over 10 years. You’ll be charged 5% of £10,000 every year for ten years – that’s £5,000 per year. The total cost of interest will be £5,000 (10 x £5000), so you end up paying back a total of £15,000 on a loan of £10,000.

No matter how much of the loan you pay off, you’ll always be paying interest on the initial amount you borrowed.

Short-term loans use this type of interest. But, because loans are made for a much shorter time than the example of 10 years above, the interest doesn’t have much time to accumulate which is good for you.

Short-term loans have higher interests in order to compensate for the fact that there are fewer monthly repayments. But that generally means that paying off £5,000 over 12 months, even with a higher interest rate, is cheaper than paying £5,000 over 10 years.

Let’s compare a short-term loan of £2,000 made over the course of a year to a £2,000 loan made over three months and a £2.000 pay-day loan.

 

 

Short-term loans – £2,000 loan with 12 monthly repayments

Let’s say you took out a short-term flexible loan over the course of a year. There are a number of important things to know. They are as follows:

  • The loan is repaid every month
  • The repayments tend to be smaller than the alternatives because the timescale to pay the loan back is longer
  • APR/interest rate will usually be smaller to stay within FCA guidelines

 

Short-term loans – £2,000 loan with 3 monthly repayments

If you took out a loan repayable over three months, you’d need to know the following points:

  • A short-term loan will have a higher rate of interest than a long-term loan as lenders need to compensate for the shorter timeframe. That’s because you aren’t borrowing for a long enough for the profit they want to make on a loan to accrue. So, to make sure they make that profit, they’ll charge you a higher rate in exchange for a shorter loan period.
  • The repayments will be larger than over 12 months because there’s less time to pay it back
  • The APR will be larger than for a longer-term loan and still within FCA guidelines

 

Short-term loans – £2,000 pay-day loan with 1 repayment

For a single payment or ‘payday’ loan, you need to be aware of these points:

  • The loan is repaid in one go usually when you receive your next pay cheque
  • Due to the immediacy of the loan and repayment, APR will be higher than the alternatives although still within the FCA guidelines.

Moneypod works with a panel of lenders to offer short-term loans from £500 to £10,000 over a period of three months to two years. We match your personal circumstances with the lenders most likely to want to offer you a short-term loan.

If you feel confident that you would be able to pay back a short-term loan successfully, please click for our short-term bridge loan application.