Short term loans, payday loans, instalment loans…? With so many different terms being used, it’s easy to understand how many people can get confused. As a responsible lender, we believe customers should have access to clear, straightforward information that not only educates, but empowers the customer with the knowledge they need to better understand what these loans mean before they take one out.
So what’s the difference?
Short term loans
For want of a better phrase, a short term loan is ‘exactly as it says on the tin’. It refers to a loan that you take out for a short period of time (normally over a period of less than a year). ‘Short term loan‘ is a general term that is used to refer to a variety of different loan products where the consumer is expected to pay the loan back over a limited period.
Payday and instalment loans, are two different types of short term loan product. With that said, payday loans and instalment loans differ slightly from one another. Which brings us on to…
Payday loans
A payday loan refers to when you borrow money from a lender, and then settle the loan balance the next time you get paid. In other words, it’s a loan to cover you until payday. On average, payday loans are usually taken out for a period of two weeks, and are most commonly used when people find themselves with an unexpected expense and are in urgent need of cash.
Historically with payday loans, many people who found themselves unable to repay their loan in full at the end of the month, ended up paying more than they originally signed up for because they would rollover the amount to the following month. There was no cap to the amount of times your loan could be rolled over, meaning that many people would struggle to settle their loan as the interest and the loan amount would keep increasing. Thankfully this is no longer the case. Since January 2015, new FCA regulations mean that rollovers are capped to a maximum of 2, and you can never be charged more than twice the original loan amount.
Instalment loans
Similar to payday, instalment loans are generally repayable over a short term, however they offer much more flexibility for the customer. With an instalment loan, you can choose to spread your loan repayments over a number of months – in other words you are paying the money back in instalments. It’s also more likely that with an instalment loan, you could (subject to assessment) borrow more than you could with a payday loan.
Our instalment loans come with the added benefit and peace of mind that there are no rollovers, meaning no unexpected costs. Although the interest may be slightly more, this is because you are paying the loan back over a longer period of time. The aim of an instalment loan is to make the repayments more manageable for the customer, by breaking up the loan into smaller, more affordable chunks spread across a longer term, rather than one big repayment.
The repayment terms for instalment loans generally differ from lender to lender. Some lenders offer quite a rigid repayment plan where you can only pay back the loan over a predetermined fixed period, while others let you be more flexible. An instalment loan from Mr Lender gives you the flexibility of repaying your loan between a period of 3 and 6 months. Because we calculate our interest daily, it means you only get charged interest on the loan amount you have left to pay…so as your loan goes down, so does the interest, meaning that you actually pay back less than you might do with some other lenders. Our aim is to ensure our loans are as straightforward and manageable as possible for the customer; we work to decrease capital, not increase debt. By charging our interest daily, it means you aren’t tied into the full term of the loan, giving you the control to repay your loan in full at any time by contacting our customer service team, resting safe in the knowledge that you haven’t been overcharged in interest by repaying early.
The reason why someone might need an instalment loan is the same as that of a payday loan; basically because an unexpected cost has arisen. However should you have a large expense which means you can’t afford to settle the loan in one repayment, an instalment loan may be a more suitable option for you, bearing in mind that you can spread the cost to make it more manageable.
Please bear in mind, as with any loan, late repayments can cause you serious money problems. For help and advice, go to moneyadviceservice.org.uk.