Do Any Short-Term Loans Have A Low APR?

Guide to Short-term loan interest rates.

Short-term loans can be the go-to solution for people facing financial emergencies when all other options have been exhausted. When comparing loans online, you might have noticed that short-term loans seem to have a much higher APR than their long-term counterparts. In this guide help you to better understand the reason for this and what APR is.

Annual percentage rate (APR) – it’s the official, standardised rate that lenders use so you can see how much a loan with them will cost. It differs between lenders due to their specific interest rates and any additional charges. It’s a requirement that every lender makes it clear what their APR is before you sign a credit agreement with them. The lower the APR, the less the loan will cost.

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The APR is an annual rate that is calculated to show how much it will cost to borrow money over 12 months. When a loan is longer than 12 months the APR is calculated by adding up the total amount of interest and fees, then dividing to create a yearly average.

Short-term loans don’t fit this model because they are designed to be borrowed for very short periods of time, usually a minimum of 3 months. This means that when the loan in question is less than 12 months long, the total cost is multiplied to give an average for the year. This is why the APRs on short-term loans are usually much higher than those on long-term loans.

Your questions, answered

What's the difference between APR and representative APR?

Know the difference between typical APR and representative APR. You will see both when you’re comparing loans. The way APR is calculated is standardised so that each APR is comparable to the next. However, different loans will be influenced by factors specific to their terms and your individual circumstances.

The typical APR is the rate that over two-thirds of borrowers are offered – this is what you’re likely to be offered as a new customer.

The representative APR is the rate that 51% or more of borrowers are offered. Lenders often offer repeat customers lower APRs because they have shown that they’re reliable and trustworthy when it comes to repaying their loan. This means that by displaying great borrowing behaviour with a lender, you should be offered a lower APR next time you need to borrow from them.

Will my short-term loan have a high-interest rate?

It’s not just APR that varies by lender, interest rates do, too. Higher interest rates mean your loan will be more expensive to borrow, especially over a long period of time. When you compare short-term loans online, you should see a variety of interest rates on offer.

The good news is the Financial Conduct Authority introduced a price capping measure to protect customers from excessive charges when borrowing short-term credit in 2015. This measure ensures you will never be charged more than 0.8% interest per day when you take out a short-term loan.

Once you have found a lender with an interest rate that suits you, it’s important to remember that the more money you borrow and the longer you borrow it for, the more money you’ll have to pay back in interest. As a general rule of thumb, the daily rate of interest reduces as the borrowing period and loan size increase. This means that whilst you will be paying more in interest overall, the loan can be more affordable because the repayments are spread out.

In some circumstances, you can reduce the amount of interest due by repaying your loan early. This is great if your situation changes and you no longer need to borrow the money. Each lender is different so you’d need to speak to yours to understand whether this would be possible or not.

What will make my short-term loan more expensive?

If you make your repayments and stick to the payment schedule outlined in your credit agreement, you will never need to pay more than the total stated when you signed the agreement. However, if you start to miss your repayments things can start to get expensive. Missed repayments usually lead to missed payment fees or other charges.

Also, by not making your payments, you are potentially extending the amount of time you’ll be borrowing for; this will lead to more interest being accrued. Because short-term loans are not designed for long-term borrowing, they can get expensive quickly if repayments aren’t upheld. Failing to meet repayments will only lead to prolonged debt.

When it comes to making your repayments, all you need to do is ensure you have the funds available in your bank account on the scheduled day. Lenders collect their repayments automatically from your bank account using a continuous payment authority (CPA), which is something you agree to when you apply for your loan. This means you don’t need to do anything more than have the money in your account to be collected.

Sometimes life can be unpredictable, circumstances can change, leaving you in a position where it’s not possible for you to make the repayments for your short-term loan. If this happens, you must contact your lender immediately. The majority of lenders have processes in place to help their customers who are struggling, often in the form of payment plans. They will support you in finding a fair resolution and might even be able to freeze your interest so that you’re not incurring any additional charges.

If you know before applying for your short-term loan that you will struggle to make the repayments, you should not proceed with the application. If you can afford to go ahead, you should only apply for the amount of money you need. By applying for more than you need, you are making the loan more expensive straight away.

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