Short Term Loans for Bad Credit: What You Need to Know

Understanding Short Term Loans for Bad Credit

Short term loans offer quick access to funds, often for emergencies or unforeseen expenses. For those with a less-than-perfect credit history, these loans can seem like a lifeline. However, it’s important to understand how they work, their costs, and the alternatives available before committing.

Who Should Consider This Option?

Short term loans for bad credit are designed for UK residents who have been declined by mainstream lenders due to poor credit scores. They may suit individuals facing urgent financial needs, such as car repairs or unexpected bills, who lack savings or other borrowing options.

Key Concepts and Terminology

Let’s clarify several terms you’ll encounter:

• Short Term Loan: Typically repayable over a few weeks to 12 months. Amounts are usually smaller than standard personal loans.

• Bad Credit: Refers to a low credit score, often due to late payments, defaults, or CCJs (County Court Judgments).

• Direct Lender vs. Broker: Some companies lend their own money, while others (like Kandoo) act as brokers, matching you with a suitable lender.

• APR (Annual Percentage Rate): The total cost of borrowing expressed as an annual rate, including fees and interest. APRs on short term loans can be significantly higher than standard loans.

• Guarantor: Some lenders may require another person to co-sign and take responsibility if you cannot repay.

Understanding these basics is crucial to weigh the risks and benefits.

Available Options for Borrowers with Bad Credit

Even with bad credit, several types of short term loans may be accessible:

1. Payday Loans

• Small, high-cost loans intended to be repaid on your next payday (usually 1 month).

• Quick approval, but interest rates are very high.

2. Instalment Loans

• Repaid over a period of 3–12 months, with fixed monthly repayments.

• More manageable than payday loans but still costly.

3. Guarantor Loans

• Require a friend or family member with good credit to co-sign.

• Lower rates than unsecured bad credit loans, but the guarantor is liable if you default.

4. Credit Builder Loans

• Smaller sums designed to help improve your credit score if repaid on time.

5. Secured Short Term Loans

• Secured against an asset (like a car). Lower risk for lenders, so rates may be better, but your asset is at risk.

Each option comes with its own eligibility criteria and implications. Use comparison tables and calculators to assess costs before applying.

Costs, Risks, and Impact

Short term loans for bad credit often carry:

• Higher Interest Rates: Expect APRs from 50% to 1,500% or more.

• Fees: Late payment charges, arrangement fees, and early repayment penalties can apply.

• Credit Score Impact: Missing repayments harms your credit file further, making future borrowing harder.

• Debt Spiral Risk: Repeated borrowing or rolling over loans can lead to unmanageable debt.

A representative example: Borrowing £300 over 3 months at 1000% APR could mean repaying nearly £400 or more, depending on fees. Use the lender’s representative example to estimate your costs.

Eligibility and Requirements

Lenders assess your eligibility based on:

• Age (typically 18+)

• UK residency and bank account

• Regular income (employment, benefits, or self-employment)

• Credit history (even bad credit is considered)

• Affordability checks to ensure you can repay

Some lenders may require a guarantor or security. Always check the specific requirements before applying.

How the Process Works: Step by Step

1. Research and compare lenders or use a broker

2. Check eligibility criteria and required documentation

3. Complete an online application form

4. Undergo a credit and affordability check

5. Receive a lending decision (often same day)

6. Accept the offer and sign the agreement

7. Funds are transferred to your account

8. Repay according to the agreed schedule

Pros and Cons to Consider

Pros:

• Fast access to funds

• Can be available to those with poor credit

• May help rebuild credit with on-time repayment

Cons:

• High interest and fees

• Risk of further damaging credit if repayments are missed

• Limited loan amounts

• Potential to fall into a debt cycle

It is crucial to compare options and consider long-term affordability.

Points to Watch Before Deciding

Before applying, consider these:

• Affordability: Can you comfortably make the repayments?

• Total Cost: Are the fees and interest justified by your need?

• Reputation: Is the lender FCA-authorised and reputable?

• Alternatives: Have you explored cheaper or safer options?

• Impact: Understand how this loan could affect your financial future.

Never borrow more than you need, and avoid using short term loans for non-essential spending.

Alternatives Worth Considering

• Credit Unions: Often offer fairer rates, even for those with bad credit

• Overdrafts: Some banks may offer arranged overdrafts at lower rates

• Family or Friends: Borrowing informally avoids high interest, if possible

• Budgeting Help: Charities and debt advice services can help manage cash flow

• Government Schemes: Short term advances or budgeting loans from the DWP for those on benefits

Exploring alternatives can save money and reduce risk.

Frequently Asked Questions

1. Will applying for a short term loan hurt my credit? A hard credit check can slightly reduce your score, but the impact is minor unless you apply repeatedly.

2. How quickly can I receive funds? Funds can often be paid out within hours, though some lenders take up to a day or two.

3. Can I get a short term loan with a CCJ or default? Some lenders consider applicants with CCJs or defaults, but rates may be higher and options limited.

4. What happens if I miss a repayment? You may incur fees, additional interest, and possible collection action. Your credit score will likely drop.

5. Are brokers safe to use? Brokers like Kandoo are regulated by the Financial Conduct Authority (FCA) and can help find suitable lenders, but always check credentials.

6. Can I repay early? Many lenders allow early repayment, sometimes with a fee. Check the terms before committing.

Next Steps

If you’re considering a short term loan for bad credit, take time to compare your options. Use online calculators, read lender reviews, and consider alternatives. If in doubt, seek free debt advice from a charity or financial adviser. Responsible borrowing can help in a crisis, but preparation and understanding are key.

Disclaimer

This article is for informational purposes only and does not constitute financial advice. Consider seeking independent advice before applying. Borrowing always carries risks, especially with bad credit. Check terms and eligibility carefully before proceeding.