A complete guide to short-term loans in the UK
Emergency situations, healthcare, unexpected bills – all of them can leave your finances a little short at the end of the month, potentially leaving you in a situation where you need a small loan to tide you over.
The problem, however, is that you need a solution now to ensure those issues are resolved quickly. You don’t want a long-term loan as you don’t want to commit to a long-term contract or take out more than £1,000, and you don’t want to take out a credit card as you only need a temporary financial solution.
So, what’s the best option?
The answer: a short-term loan.
Understanding short-term loans in the UK
Before applying for a short-term loan, understanding everything there is about them – including what a short-term loan is, the difference between secured and unsecured loans, and what short-term loans are used for – is essential, and will help you to make an informed (and responsible) borrowing decision.
What is a short-term loan?
Essentially, a short-term loan is a loan where the amount borrowed (and the accrued interest) are paid back in weeks or months, not years, depending on the lender and their policies.
Generally speaking, short-term loans are “unsecured” – i.e. they require no collateral to be placed against them – making them a more accessible (and practical) option for those requiring a quick financial boost to manage emergencies.
Secured vs unsecured loans – what’s the difference?
A secure loan is a loan that is secured against an asset that the borrower owns. A mortgage, for example, is a secure loan that is taken out against a property. Interest rates for secure loans tend to be lower than unsecured loans but as they are taken out against assets, they can be a risky option if payments are missed.
Secure loans are normally used to borrow large sums of money and the asset is used as collateral in the event the borrower cannot pay the loan back.
What are the benefits of a secured loan?
- Larger sums of money
- More accessible and easy to obtain
- Lower interest rates
- Can be acquired even with ‘bad’ credit
What is an unsecured loan?
Unsecured loans are based on a borrower’s creditworthiness which assesses the likelihood of the borrower being able to repay their debt. A creditworthiness assessment involves lenders analysing an applicant’s repayment history and credit score to determine the likelihood of them defaulting on debt obligations. Another key element in the creditworthiness assessment is affordability risk. Affordability risk is defined as the “risk to the customer not being able to make repayments or of these having a significant negative effect on their overall financial situation”.
On November 01 2018, the new Financial Conduct Authority (FCA) rules regarding affordability risk came into play. Under the new rules, lenders are expected to make a ‘reasonable assessment’ not just of whether the customer will repay, but also of their ability to repay affordably and without significantly affecting their wider financial situation.
Lenders must also make a clearer distinction between ‘credit risk’ and ‘affordability risk’, and creditworthiness assessments should include an assessment of affordability for the borrower.
Borrowers do not need to offer any assets up as collateral for unsecured loans, so they do not lose property or important valuables if they miss payments. Failure to repay an unsecured loan, however, can result in additional late fees and interest, county court judgements (a way for creditors to claim the money they are entitled to), bankruptcy and the applicant’s credit record being damaged.
- What are the benefits of unsecured loans?
- No need for assets or collateral to be issued against the loan – no risk of losing a house or car, for example
- Quick completion – as there’s no asset or collateral to evaluate
- Great for those that only need to borrow a small amount – good for unexpected emergencies
Find out the details on secured and unsecured loans by reading our blog.
What are short-term loans used for?
Given their accessibility (being unsecured), short-term loans provide a flexible financial solution for those needing to pay for emergencies or unexpected situations at the end of the month without committing to a long-term contract. Things like housing crises, unexpected bills, family emergencies, hospital fees, car maintenance, and other small (but important) things, are typically what short-term loans are used for.
However, while accessible and flexible, short-term loans should not be used to pay off other forms of debt (as this could lead to further financial difficulties). They also shouldn’t be used to fund a shopping spree, night out or holiday. Make sure to use them only for the things that matter or to address unexpected situations or emergencies.
Finally, borrow responsibly. If there’s any uncertainty around financial circumstances or ability to repay a short-term loan, carefully consider if it’s the right option and ask lenders for expert advice.
Find out more about Uncle Buck’s short-term loans.
How do UK short-term loans work?
Short-term loans are designed to be paid back over a period of months (or weeks, in some cases), unlike traditional loans which are paid over several years.
Most lenders allow customers to apply for loans online, so those interested in a short-term loan can apply whenever, wherever. On the website, applicants state the amount they would like to borrow and how long for and agree on repayment dates. The lender will then provide pre-contractual information, such as the cost of the loan, how repayments are collected and what happens if those repayments are not met.
Once the application has been received, lenders will conduct a creditworthiness assessment. If the application is successful, the customer will receive their loan and start making repayments, including interest, on the agreed date until the loan is repaid in full.
Repaying short-term loans
Short-term loans in the UK are usually repaid through monthly instalments, though some can be paid weekly or in bulk at the end of the month. repayments are managed through what’s called a continuous payment authority (CPA), which allows lenders to automatically collect the monies they are owed on scheduled repayment dates from the specified account.
Repayments consist of the agreed amount (this will depend on the amount borrowed and the lending term) and the accrued interest as per the interest rate on the lender’s website.
- Repaying loans early
While it’s entirely possible to repay part or all of a short-term loan early (known as a partial or full early settlement), some lenders have ‘early repayment charges’ or ‘early repayment penalties’ as a result of an early repayment. This information should be documented in the loan agreement or contract. Make sure to carefully check the terms and conditions of the loan and ask the lender about their early repayment policy. Uncle Buck does not impose penalties or early repayment charges for settling early.
In addition to an early settlement, borrowers can make ‘over-payments’, i.e. repaying more than the agreed amount each month. The benefit of doing so is that borrowers reduce the loan term or monthly instalments, allowing them to pay it back over a shorter period, and may be entitled to a reduction in the total amount of interest owed.
- Late Fees
For repayments received after the due date, late fees will usually be charged. For example, if a loan payment is due on the 1st of any given month and is not paid by the 2nd, the payment will be considered past due. Of course, the application of late fees will depend on the lender. Some will immediately apply the charge, whereas others have a grace period. Check the terms and conditions of the loan agreement to make sure.
How to manage short-term cash loans effectively
A common myth and misconception when it comes to short-term loans in the UK is that they trap you in a “cycle of debt”.
The fact is that short-term loans, when used responsibly and for the right reasons, can provide a much-needed lifeline to those needing to pay for unexpected situations or emergencies – especially at the end of the month.
Just because short-term loans are accessible, it doesn’t mean that they should be used without careful consideration. They should be reserved, exclusively, for things that matter and anyone applying should carefully research lenders and obtain the information they need in order to make an informed borrowing decision.
What’s the difference between a payday loan and a short-term loan?
In the past, “payday loans” were small cash loans that lenders offered to customers for just a few weeks, a month or until their next payday. Short-term loans, on the other hand, (also referred to as instalment loans) were (and are) spread over the course of several months and up to a year.
The problem, however, is that these terms were used by customers almost interchangeably, making it difficult to separate one from the other. The truth is they are both high-cost short term credit options and recognised in the financial services industry as, in fact, the same thing.
Find out more about short-term loans.
Everything you need to do (and know) before applying for a short-term loan in the UK
Applying for any form of credit can be time-consuming and overwhelming, especially with all the jargon relating to interest rates, APR and repayment schedules.
To make the process of evaluating and applying for short-term loans in the UK easier, we’ve highlighted the most important steps to take and what to consider.
- Homework, homework, homework.
There are numerous short-term loan lenders in the UK – and while lenders are all subject to the same regulations, some will provide a better level of service than others. They will also offer more favourable loan terms or flexibility to help customers meet their repayment schedule. Take the time to look around and carefully assess what’s available before making an application. Loan price comparison websites are certainly worth using and will make it easier to compare short-term loans.
- Lender or broker?
Before taking out a short-term loan in the UK, decide on whether to use a lender or a broker.
But what’s the difference? Well, lenders will lend directly to customers. To determine eligibility, they will conduct one thorough and comprehensive search of the applicant’s credit history, leaving a single inquiry on the applicant’s credit file. Brokers, on the other hand, act as a middleman for customers and lenders. Those applying for loans via brokers will have their details collected and then distributed to relevant lenders. Upon receipt of the applicant’s details, some lenders will conduct a hard inquiry, whereas others will not conduct a hard inquiry until an application has passed the initial approval stage. Find out more about the difference between getting a loan directly from a short-term loans lender or a broker.
What are hard inquiries?
Hard inquiries are credit inquiries that occur when a lender checks an applicant’s credit report when making a lending decision. In the process, lenders complete a creditworthiness assessment, analysing an applicant’s repayment history and credit score, to determine the possibility that they will default on their debt obligations.
Why are hard inquiries important?
A single hard inquiry will do minimal damage to someone’s credit score, but multiple hard inquiries in a short period of time could suggest an applicant is in financial difficulty and therefore a “high risk” customer.
So, should you use a lender or broker?
Both have their advantages. Going directly through a lender ensures fewer hard inquiries on file – with a minimal impact on a person’s credit score – but brokers, on the other hand, do most of the legwork, meaning that less research needs to be done to find the right lender or loan option. Loan comparison websites, such as allthelenders, the largest comparison site in the UK for short-term loans from direct lenders, can be useful resources. Use them wisely!
3. Know the details of the short-term loan
This means looking at the terms and conditions of the loan, interest rate, APR and the repayment terms.
All of this information should be readily available on the lender’s website and stated in the terms and conditions of the loan.
Explaining interest rates and the annual percentage rate (APR)
Interest is the cost of borrowing money and is the money a borrower pays back in addition to the initial loan amount. Interest is typically calculated as an annual percentage of the loan amount if you were to have paid it back over one year.
Interest rates can either be fixed or variable. Fixed rates stay the same throughout the loan agreement, whereas variable interest rates are tied to an index or benchmark rate and can, therefore, fluctuate.
Annual percentage rate (APR), on the other hand, is a single percentage reflecting the total cost of any loan product over a full 12-month period, including any interest accrued, fees and other costs involved in procuring the loan.
For example, taking out a short-term loan of £500 over a period of 4 months at an APR of 1250.4% would require:
- Three monthly repayments of £180.55
- One final repayment of £172.96.
The interest charge would be £214.61 and the total to repay would be £714.61. In essence, the monthly repayment plus the total cost of credit equals the full total cost of any loan product over a 12-month period. To calculate loan repayments based on APR, The Guardian has a handy loan calculator.
Want to find out more, check out our blog on APR and interest rates explained.
4. Know how short-term lenders in the UK collect repayment
As mentioned previously, lenders in the UK typically manage short-term loan repayment through a CPA, ensuring payment is collected automatically on the agreed repayment dates. Some lenders accept bank transfer as an alternative method and will list their sort code and account number so that repayment can be made online.
5. Your credit score
Finally, credit scores – arguably the most important aspect of the application process.
Whenever someone applies for credit, the lender will check the applicant’s credit report to get an understanding of his or her credit history. Think of your credit report as a financial CV – it has your payment history, outstanding debts, current accounts, credit inquiries, name, address, date of birth, your job, county court judgements, bankruptcies and other details.
All this information is used by lenders to assess applicants and determine suitability or in other terms, creditworthiness.
Anyone can get his or her credit report from one of the three credit reference agencies in the UK – Experian, Equifax or TransUnion (previously Callcredit) – for free and checking will not damage their credit score. Find out more about reliable ways to check your credit score.
Above are just a few of the most pertinent things to consider before taking out a short-term UK loan, find out the other things you should consider before taking out a short-term payday loan.
Myths and misconceptions about UK short-term payday loans
There are plenty of payday loan myths and misconceptions in the UK: lenders are trying to trap borrowers in a cycle of debt; lenders have hidden costs; short-term loans in the UK are unregulated.
However, often examples in the media only ever show a minority of lenders (and are therefore not representative of the whole industry) or those who have borrowed irresponsibly.
The fact is that the short-term loans industry in the UK is one of the most regulated markets in the world. There are limits on interest applied to loans (meaning no spiralling fees), caps on default fees to protect customers who struggle to pay back loans, and a cap on the maximum total cost of a short-term loan, meaning customers will never have to pay interest that exceeds the loan amount.
Find out more about how FCA payday loan regulations have improved the market for the better
Why take out a UK short-term loan with Uncle Buck?
We are a direct lender of unsecured short-term loans in the UK and have been operating in the high-cost short-term credit (HCSTC) industry since 2004, making us one of the most established lenders around.
What are the benefits of taking out a loan with Uncle Buck?
Our customers are at the heart of everything we do and we ensure that we deliver exceptional customer service at all times. We make sure to use our extensive experience and knowledge to provide our customers with all the information and support they need, so applicants (and customers) can be assured they are receiving the very best service. In addition, taking out a loan with Uncle Buck means…
- No need for collateral or security
As our loans are unsecured, applicants can borrow up to £1,000 without having to put down any form of collateral against their loan. We only conduct one soft inquiry (or search) per application we receive, leaving a light footprint on those credit reports. If the application is provisionally approved, one hard inquiry is made on the applicant’s credit report.
- Get a loan on the same day
Customers can apply for same day loans online through our application form. If an application is approved, we can transfer funds on the same day, providing our customers with the money they need, when they need it. Should any support be required – whether it’s applying for one of our loans, discussing payment options or looking for advice, we have a dedicated, UK-based customer service team that can provide expert advice and support with regards to your loan.
- Dedicated customer service
Last – but certainly not least – we pride ourselves on our superior customer service. In an industry filled with short-term lenders, all of whom provide very similar products and services, the differentiator for us is the extent we go to help our customers. The satisfaction of our customers is central to everything we do – and they can be assured that we will always do our best to help them.
Applying for a short-term loan in the UK with bad credit
In the UK, customers with bad credit can still apply for a short-term loan. We take all factors and variables into consideration when making lending decisions to ensure we treat our customers fairly. Every customer’s request for credit is treated as a fresh application and we will conduct credit and affordability checks on a per customer basis.
For customers with bad credit who are looking to rebuild or improve their credit rating, find out how you can improve your credit score with our free eBook.
Top FAQs about applying for a short-term cash loan at Uncle Buck
- How long does it take for an Uncle Buck loan to be processed?
You can apply online at any time. Upon completion of your application, you will receive a provisional decision right away. If your loan is approved, funds will be transferred to your account within 15 minutes. We process payments daily between the hours of 6am-8pm.
- Do I have an online account?
Yes. You have an online account from which you can manage your loan, repayments and your details.
- Can I repay my loan early?
Of course. Just call us by telephone on 01959 543400 and one of our customer services team will assist you. Once we have received your instructions to repay your loan, we will debit the full amount required from your account. You will not be charged any early repayment fees and the early settlement figure is just the current balance on the account.
- How long can I take out an Uncle Buck loan for?
We offer four and six-month loans for up to £1,000. Applicants can choose how much they wish to apply to borrow, how long for and the pay frequency. Repayments will be set to the applicant’s chosen pay dates, allowing them to spread repayment over regular, monthly instalments. New customers, however, are capped at £500. Simply move the slider to select the amount you wish to borrow.
- Who is eligible for an Uncle Buck loan?
To be eligible for an Uncle Buck loan, applicants must:
- Be aged 18 or over
- Be employed and a resident in the UK
- Have their salary paid directly into their bank account and have a valid debit card for that account
- Have a valid email address and mobile phone number that we can text a code to
- Confirm they are not currently signed up to or anticipating entering a Debt Management Plan, Individual Voluntary Arrangement or debtor under any bankruptcy proceedings
Of course, fulfilling the above criteria is just the first step. Applicants will need to have credit and affordability checks so we can be sure we are lending responsibly. If you are wondering if you are eligible for a payday loan with Uncle Buck, we’ve compiled a helpful resource on our eligibility criteria.
Once the application has been approved, we will issue the funds on the same day straight to the specified bank account.
Find out more about our payday loan requirements and how they work, read our blog!
Many of the myths and misconceptions around short-term loans have been popularised and perpetuated by the media. For those looking for a flexible, short-term financial solution for unexpected or emergency situations, short-term loans are arguably one of the best options.
We offer some of the most competitive short-term loans in the UK, so if you are faced with cash flow problems due to unforeseen bills or expenses and have a less than average credit history, apply for a short-term loan with us. We’ll carefully assess your financial situation and creditworthiness and provide you with a decision as quickly as possible.
Representative 1250.4% APR
Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk