Short-term loans, also known as payday loans, have become increasingly popular in the UK as a way for individuals to quickly access cash for unexpected expenses or emergencies. However, these loans come with a number of risks and drawbacks that should be considered before taking one out.
So, what should you be aware of?
We have a guide to help. Read on before you take out your short-term loan.
High Interest Rates
One of the major risks of short-term loans is that they often come with high-interest rates and fees. This means that the total amount of money that needs to be paid back can quickly add up, making it difficult for borrowers to repay the loan in full.
In some cases, the interest rates on these loans can be as high as 1,500%, which can make it nearly impossible for borrowers to pay back the loan within the short repayment period.
The Financial Conduct Authority (FCA) capped interest at 0.8% a day for short-term loans. This sounds small, but it can add up quickly if you fail to repay your loan.
Cycles of Debt
Another risk of short-term loans is that they can lead to a cycle of debt. Many borrowers find themselves unable to repay the loan in full and are forced to take out another loan to pay off the previous one. This can lead to a spiral of debt that can be difficult to break, making it even harder for borrowers to get back on their feet financially.
Impact on Your Credit Score
In addition to these financial risks, short-term loans can also have a negative impact on a borrower’s credit score. If a borrower misses a payment or defaults on the loan, it can have a significant impact on their credit score, making it more difficult to access credit in the future.
This can be especially detrimental for those who are already struggling financially, as the high interest rates and fees can make it even harder for them to get back on their feet.
The process of applying for a short-term loan can also be difficult, as many lenders require borrowers to provide a lot of personal and financial information. These could include employment and income details, bank statements and identification documents. This process can be time-consuming and can also put your personal information at risk.
However, the best short-term loan companies make this process straightforward. Some even guarantee you next-day verification and funding.
A Fast Solution
While short-term loans can be a convenient way to access cash quickly, they come with several risks and drawbacks that should be considered before taking one out. High interest rates and fees, the potential for a cycle of debt, and negative impact on credit scores are just a few of the risks associated with these loans.
It is important for individuals to weigh the potential risks against the benefits and consider alternative options before taking out a short-term loan.