When you are shopping around for short term loans, you will typically look for the best rates possible and avoid overpaying.
When finding the best rates, you will need to look carefully at the type of product you are borrowing (e.g unsecured or secured) and also look at your own personal criteria (i.e income, credit score). To get the best rates, we are going to explore:
- The rates charged
- Good or fair credit score
- Stable income
- Debt-to-income ratio
- Comparing rates from lenders
- Comparing the loan term
- Repaying early
Understand the rates charged
The APR is used to show the price of any financial product and this is universal across credit cards, loans and mortgages. Short term lenders
will use the representative APR and this is the rate offered to at least 51% of successful candidates – so whilst you may be eligible for this rate, you may end up paying higher or lower than the rate advertised.
Loans are categorised as being either secured (borrowed against an asset such as house or car) or unsecured (there is no collateral required). Both secured and unsecured loans can offer high or low rates, depending on your circumstances and the type of product.
For instance, the cheapest unsecured loans
start from around 3% and this will be available to those with the best credit ratings and affordability. However, for those with bad credit, they may lean towards using payday loans
which are still unsecured, but regularly carry an APR of up to 1,000% APR or higher.
For secured loans, the best rates possible start from around 6% to 10% APR, but this will require you to use an asset, like your car or home, and for it to be valuable and in good condition – and your credit and income will be taken into consideration too.
By understanding the different products, you should be able to determine which kind of short term loan is best for you. In addition to APR, you should also look at:
- The length of the loan (longer you borrow, the more expensive)
- Monthly repayments
- Fixed or variable rates (variable rates may go up)
- Early repayment fees
Good or fair credit score
To get the best rates for any short term loan, you should ideally have a fair or good credit score. This is something that you accumulate over time by consistently repaying other types of loans and credit on time.
For most lenders, having a good credit score is a key indication on future behaviour and it gives the lender confidence that you will be able to make future payments on time.
By comparison, if you have a poor credit score, this may cause the lender to be more cautious with whom they lend to – or they may charge higher rates to manage the level of risk.
You should regularly monitor your credit score and always look for ways to improve it. You can use a free trial from the likes of Experian or Noddle or you can order your credit report for just £2
from the government.
A stable income will always maximise your chances of accessing the best rates for short term loans.
Lenders and mortgage providers like to see customers who have been with the same employer for several months and years, because this gives them confidence that a regular income will be received and monthly repayments can be paid.
This will be preferred over someone who is new to a job or cannot hold down a job for more than a couple of weeks.
For some types of finance, you will be required to provide 3 months’ worth of payslips or proof of income if you are self-employed.
Low debt-to-income ratio
When applying for a short term loans, lenders will often look at your debt-to-income ratio and this includes how many other regular expenses and costs that you have each month.
Although you may have a good credit score, you may be inundated with other costs through school fees, credit card bills, car finance and more – and you may have very little disposable income. This is something that a lender will take into consideration to determine your level of risk, the amount you can borrow and the rates you are charged.
Compare different lenders
Every lender and bank will charge different rates for personal, unsecured and secured loans. To get the best rates, it is important to shop around using price comparison sites and searching the web for different rates and offers.
In some cases, you may find that there are lower rates available and other perks available, such as for different professions (e.g nurses), cashback or nectar points, preferential rates for small businesses or from the branch you bank with.
Consider the loan term
The loan term or loan duration may also impact the rates that you are charged and also how much you pay overall.
In most cases, the longer the loan term e.g 5 years, 10 years or 20 years, the more interest is accruing over time, which makes it more expensive.
In some cases, it is more expensive to borrow for a shorter period of time such a payday loans, because you are paying for the convenience of getting fast cash.
But for short term loans, personal loans and mortgages, you will generally pay more interest overall when you are borrowing for longer and this is something to take into consideration.
If you find that you are in a position to repay your loan earlier than scheduled, you will typically accrue less interest overall and make quite a saving. Some lenders will charge early settlement fees, so this is something to be aware of.
Whilst this may not be reflected in the interest rate, you will pay less overall if you close out your loan in 4 to 6 months, compared to 6 or 12 months.
At Fund Ourselves, we offer loans from 4 to 6 months and customers will always have the option to repay early, at any time, and with no extra fees involved.