Short term loans and payday loans are offered by many different Financial Conduct Authority (FCA)-approved finance providers here in Britain. But what is the difference between a short-term loan and a payday loan? Which would be the better option for you?
Payday loans are extremely popular with those essentially looking for an advance on their wages.
If you’re urgently in need of cash a few weeks before your next pay cheque and you know that you will be receiving enough money to cover the loan on the day you actually get paid by your employer, you can get access to the finance you need straight away – ideal for emergencies like if your car breaks down and you need to get it back on the road.
But, if you need a larger amount of money to cover a much bigger bill or purchase and you know that paying it all back in one go will leave you short of the cash you need to get by for the next month, a payday loan would not be the best course of action for you.
If you are in that position, what would be ideal is an option that allows you to repay your loan in affordable chunks over an extended period of time.
These type of loans allow you to pay back the amount you have borrowed to the lender in scheduled, equal-sized payments. This continues until you have paid back the loan in full. You can pay back your loan in a time that suits you – 3, 6, 9, 12, 18, or 24 months. The shorter your loan, the higher your monthly repayment will be. The longer your loan, the less money you have to find a month to meet your repayments.
Just like other loans, they can be either secured or unsecured. The biggest and most importance difference between an instalment-based short-term loan and a payday loan is that, with a short-term loan, you can spread out the cost over months or up to a couple of years rather than pay it all back in one go, like you have to do with a payday loan.
As with any loan, a short term loan attracts interest. To work out whether what you have to pay back every month is going to be affordable for you, all you have to do is add the interest to the loan and divide it by the number of repayments – and that’s how much you’ll be paying back every month.
If you’re interested in a short-term loan, your short term loan provider can spread out the total amount you need to repay in a time period of between 3 and 24 months. This gives short term borrowers a lot of options.
Can I afford to make the repayments?
Short term loans are popular because it gives borrowers the option to reduce the amount they need to repay each month. Let a short term finance provider know how much you want to borrow and then choose a time scale to pay the loan back over where the monthly repayments sit comfortably inside your budget.
A great example of a long-term instalment loan is a mortgage on a home. The money is borrowed from the lender and repaid in multiple scheduled instalments over many years.
Some people make the mistake of thinking a credit card is also a kind of instalment loan. However, whilst the money can be repaid in a series of payments, it is actually a line of credit rather than a loan.
How to budget for loan repayments?
Make sure you know exactly how much you need to pay at each instalment. If your job pays monthly, all you have to do is ensure that you keep aside enough money when you’ve been paid by your boss and before your monthly loan repayment is due.
However, if you get paid weekly, you will need to budget for your repayment more carefully. First of all, divide your monthly loan instalment value by four. Then, you’ll know how much your weekly bill would be. Each week, you would just need to make sure you save that amount from your paycheque and pay the total instalment when it is due.
It is really important that you bring in enough in wages and other sources of income each month to comfortably be able to pay the money back before you take out any kind of loan.
As an FCA-approved broker, we make affordability checks because we don’t want anyone to get into any money troubles. The lenders on our panel, all of which are also responsible and approved by the FCA, take exactly the same approach.
With Moneypod as your short-term loan broker, we pair you up to a lender that offers you the best flexible short-term loan deal to suit your needs.
Everyone’s credit history is different. That’s why we look at you as a person, not just a credit report. Our lenders and ourselves consider your situation as it is right now and not three years ago.
Short-term loans bring real benefits to customer who need money in a hurry: they’re efficient, easy, and they can also boost your credit rating when you pay them back on time. Short-term loans are suitable for those times in your life when an unexpected bill or demand leaves you short. They should only be used in situations like these and not be taken out to cover normal, day-to-day expenditure.
If you feel confident that you would be able to pay back a short-term loan successfully and are looking for help now to meet a bill you didn’t expect, please click for our short-term loan application.