A Brief Introduction to Short Term Loans
There are three broad types of loan: Short term, medium term and long-term loans. Each has their own advantages and is suitable for different scenarios. Let’s have a look at some of their uses:
- Long-term loans suit large capital expenditures, such as mortgages and long-term business financing
- Medium-term loans suit large projects that don’t take very long to complete but which are marginally expensive, such as home refurbishments
- Short-term loans are suitable as a stopgap between capital and cash, for instance, if you need a loan to cover a car purchase, but you can’t save up for that money for a year or two.
These are typical reasons why we use each type of loan, but there are exceptions. For example, you can find short term loans UK for up to a million pounds. Usually, these are bridging loans and they bridge a gap between a long-term loan and a purchase. For instance, if you buy a house at auction, you may have to pay the money within a couple of weeks, but the mortgage company cannot release funds until after the due date of the sale. In this case, a person or business would use a bridging loan to cover the interim term, and then use the mortgage to repay the bridging loan.
Below, we’re going to take a closer look at short term loans UK. This is because they can often cause confusion.
How Long Do Short Term Loans Last?
‘Short term loan’ is a somewhat broad term. You can find loans that last as little as 24 hours, and as long as two years, but they we consider anything within that range to be a short-term loans. A typical term is around six months.
Do You Have to Put Up Collateral?
People often assume that, because they are short-term loans, that you do not have to put up collateral, but this is not the case. Whether you have to secure the loan against a private asset (e.g. your house) depends on two factors:
- How much you are borrowing. As we stated above, there are very large short-term loans, which can reach millions of pounds. Here, you will have to secure the loan against the property or capital purchase that you are making.
- What your credit limit is like. If you are borrowing smaller amounts (usually up to £10,000), the lender will not expect collateral. However, if you have a poor track record in repaying loans, they will want you to put something up against the loan.
Interest Rates
Short-term loans attract the highest interest rates, but in the long term, will cost you the least. The lender makes their money from the interest on the loan, and if it is only short term, they don’t have a lot of opportunity to make their money, so they charge a higher interest rate, but you end up repaying less. For instance, you take out a short-term loan of £1000 over a year at 5% APR you would repay £50. If you take out the same loan over ten years at an APR of 1%, you would repay £100. So, while the interest rate is higher on the short-term loan, because of the length of the terms, you repay less than with a long-term loan.
If you would like to enquire about short term loans UK, then please visit May Fair Bridging
