Short-term loans explained – are they a good way to borrow?

A short-term loan is a way to borrow a smaller amount of money for a short period of time. This is to be paid back—including interest—in predetermined monthly repayments.

Great for unexpected payments, such as fixing burst pipes or emergency dental work, short-term loans are usually a type of personal loan, meaning they are unsecured and you won’t need to worry about collateral.

What are the interest rates on a short-term loan?

Interest rates for a short-term loan are typically much higher than that of a long-term loan. This is due to the high risk of default loss, with no collateral to back the loan. As a short-term loan is paid off quickly, there is less time to accrue interest, meaning that despite the higher rates the overall interest paid is likely to be less.

Your personal interest rates will depend on a few factors:

• Your credit history
• How much money you borrow
• Your loan term (how long you have to pay it back)

Depending on your lender, these factors may differ slightly, and other variables may be taken into account. Always shop around for the best interest rates for you.

How long is a short loan term?

The phrase ‘short-term’ can apply to loans with a borrowing term from one month all the way up to 18 months, or even two years, although most short-term loans tend to last less than a year. With Aro, our UK lenders offer loans with shortest terms of six months.

Short-term vs long-term loans

When deciding between a short-term loan and a long-term loan, your primary consideration should be how much you can afford to pay back each month.

Short-term loans will have higher monthly repayments as you’re spreading the cost over a shorter amount of time, but because you pay off the debt quicker you will pay less overall—there is less time for interest to accrue.

If you are looking to pay back less each month, spreading your loan out over many years is one way to do so. Your interest rate may be lower, but will have more time to build up. You will likely end up paying back a larger amount.

Short-term loans come in multiple forms, depending on whether you are borrowing personally, for a business, and many other factors. The most common ways to borrow money short-term include lines of credit, merchant cash advances, and payday loans.

Lines of credit

One of the more flexible loan options available, a line of credit is similar to a credit card in that you will be offered a limited amount of funds to borrow, which you can then access as and when you wish. You will only be charged interest on what you spend, and you can pay this back either in a lump sum or split over a predetermined period of time.

Short-term loans

A short term loan, as we’ve covered earlier in this guide, is a loan that is repaid over a series of months, typically no longer than 12 months. They can be especially useful if you’re looking to spread the cost of a purchase—like a new sofa—over a few months, rather than paying for it all in one go.

They can also be helpful when needing to cover an emergency personal or business expense, and is only a temporary solution. It is a form of credit in which you will have to pay back the principal amount, as well as the agreed interest, in predetermined monthly repayments.

As long as you keep up these payments, a short-term loan should not impact your credit score negatively. In fact, demonstrating that you can reliably borrow and repay a short-term loan can often positively impact your credit score.

Merchant cash advances

Merchant cash advances are a type of loan available to businesses that take payments via a card terminal or online payment process. Instead of repaying your loan in set monthly amounts, the lender will deduct a percentage of each sale made through these avenues.

This is typically a safe and reliable way for a business to borrow, as the repayments will align with cash flow each month.

Payday loans

Payday loans are one of the more risky types of short-term loans. Interest rates are often high and they are designed to be paid back within just a few short weeks—they should see you through only until your next payday.

It is more beneficial to most people to spread out loan repayment over a few months. If you do not repay your payday loan on time, you can incur large amounts of debt and end up in a worse financial situation. They should be considered with great caution. Alternatives, such as a credit card or an overdraft, are recommended.

If none of these loan options sound right for you, there are some alternatives to consider. These do come with risks in their own right, so always be cautious about how you choose to borrow money.

0% purchase cards

One of the most common—and least costly—alternatives to loan options are 0% purchase cards.

This temporarily interest-free credit card allows you to spend as required, and pay back the borrowed amount over a set period of time. To avoid paying interest, try to clear your debt before this period ends. After this, the card’s usual rate of interest will apply.

You may encounter a minimum monthly spend in order to qualify for the 0% interest period. Always check the terms of your credit card with your chosen provider.

Buy now, pay later

Buy now, pay later is becoming an increasingly popular form of payment with many online retailers. While not a ‘loan’ as such, failing to make repayments on time can have a negative impact on your credit score. As with most credit cards and short-term loans, buy now, pay later should be used with caution.

Short-term loans can be beneficial for a number of reasons. Before taking out a short-term loan, get to know the main advantages of this form of borrowing. These include:

• Easy to apply
• Quick payment—you could have the money in your account the very same day
• Improved credit score as long as you keep up with repayments
• Quick repayment means less time to accrue interest
• No long-term commitment

Many of these factors will depend on which lender you choose, your personal circumstances, how much you borrow, and your loan term, though they are all very common benefits of short-term loans.

It is inevitable that any form of money borrowing will come with certain disadvantages—short-term loans included. Key things to consider include:

• Potentially higher interest rates
• Monthly repayments will be higher
• Often limited to small borrowing amounts

Before you apply for any short-term loan, it is important to shop around for the best option suited to you and your requirements. Check your credit score, consider how long you would like to borrow for, and how much.

Make sure you have all documents required for the application, and fill it out as accurately and completely as possible. It’s then a waiting game to see if you have been approved—this doesn’t tend to take much longer than a day with short-term loans, with applications often being accepted on the same day.

Am I eligible for a short-term loan?

Some of the eligibility criteria typically considered with short-term loan applications include:

• You must be 18 years or older
• You must be employed or self-employed
• You must be a UK resident when applying in the UK
• You should have an active bank account and debit card
• A credit check may be carried out

These criteria are largely consistent across many lenders, though there may be exceptions and additions. 

Know how much you want to borrow but unsure about how to proceed? Take a look at our loan amount guides to find the best way to borrow just the amount you need.