A guide to short term borrowing

Need a helping hand in the form of a short term loan? Whatever you might need the money for, take the time to read our guide first to avoid any mistakes.

From time to time, you might need money in a hurry. This could be due to urgent home repairs, a car breakdown, a much-needed holiday, finding a deposit on a new rental flat, or coping with a relationship breakdown.

Rather than rushing into borrowing, it’s a good idea to think about how long you will need the money for, and how best to pay it back. Making the smart choice when you need short term cashflow will help prevent you from getting into money difficulties later.

4 steps to getting the best short term loan

  1. Check the total cost of each short term borrowing method

  2. Be clear about whether you are signing up for a secured or unsecured loan

  3. Work out how quickly you can pay back the money

  4. Take steps to get the lowest interest rate possible

1. Check the overall costs

When you look at the cost of borrowing, don’t just look at the interest rate. Be aware of whether there are any fees or extra costs involved. 

First, check whether the interest rate you are being quoted is the APR (Annual Percentage Rate). This shows the total amount of interest (including charges or fees) you’ll pay on your borrowing in one year. 

There are a couple of things to watch out for. If interest rates move upwards, your borrowing interest rate may also increase, unless it is fixed for the term of the loan. An interest rate that can move is known as a “variable rate”. 

Second, if you are applying for a credit card or personal loan, the advertised rate might be an APR of 12.5 per cent. That isn’t necessarily the rate you will receive. Depending on your creditworthiness, you might be offered a higher interest rate, making your borrowing more expensive. 

When it comes to mortgages, the APR that the bank or building society quotes includes all the interest costs plus any arrangement fees. 

You should also watch out for any early repayment penalties – overdrafts and credit cards don’t tend to impose these terms, but you may get charged a fee if you try to repay a mortgage or loan early.

2. Be clear about whether you are signing up for a secured or unsecured loan

An unsecured loan is for a year or more, fixed at a specific interest rate. It is not linked or tied to any assets you own, although the rate you are quoted will be based on your creditworthiness. 

A secured loan is held against the value of your house. It is intended as a long term commitment rather than as access to short-term cash.

If you are planning to remortgage in order to release cash, for example, for a home improvement project, check whether you can really afford the increase in repayments should interest rates rise later this year. 

Unsecured loans are riskier for lenders, because if you default or fail to pay the money back they don’t have the security of being able to claim on your home.

This means they are usually more expensive than secured loans like mortgages, and the amount you can borrow is usually lower too. As a borrower, though, your home is not at risk with an unsecured loan.

3. How quickly can you pay back the money?

With a personal loan, the longer you are borrowing the money for, the more you are likely to pay in interest. 

This is not necessarily the case with credit cards, where you may be able to take out a balance transfer card or money transfer card that gives you up to 36 months of interest-free credit.

Although credit cards help manage issues with short term cashflow, always make sure you have a plan to pay off the borrowing before you sign the contract.

If you only make the minimum payment every month on your card, then you’ll only be paying off interest rather than tackling the underlying debt. You’ll still have the problem of what to do with the debt at the end of the interest-free period.

Getting an overdraft extension is one of the simplest ways to borrow money for a few weeks or months. Most current accounts offer overdraft facilities and you may, for a fee, be able to extend your overdraft

If you go down the overdraft route, it’s much better to talk to your bank first. Authorised overdrafts, which have been approved by your bank, are much cheaper than unauthorised overdrafts, where charges can rack up quickly. 

Again, make sure you have a repayment plan. Borrowing money without having a plan to clear your debt does not make financial sense.

4. How to get a cheap short term loan

When lenders assess you for a loan, credit card, mortgage or overdraft, they will look at your credit rating.

The better your credit rating, the more competitive the deal you are likely to be offered. With a higher credit rating, you are more likely to be treated well by utility companies, too. “These organisations are now lenders and the information they see and share with other providers will determine how they conduct their relationship with you,” says James Jones, a spokesperson for Experian. “This will mean an initial check to see if you are creditworthy, and whether, for example, you should have a prepayment meter fitted and how they should respond to any late payments. 

You can improve your credit rating by making sure you are on the electoral register, trying not to miss any loan, mortgage or utility payments, cancelling any old credit cards that you no longer use, and are not making too many applications for credit in a short time period.

You can also check that the information on your credit file is correct by asking one of the credit reference agencies like Experian or Equifax for a copy of your £2 statutory credit reference file.

A summary of short term loan options

  • Overdrafts are a cheap, short term way to borrow money, but make sure they are authorised by your bank first.

  • Credit cards are a quick and flexible means of paying for things but do have a plan for paying them back.

  • Personal loans are a long term commitment and the lower rates of interest are balanced by early repayment fees.

  • Mortgages are secured against your home and although interest rates are much lower, your house is at risk if you default on your loan.

If you need help with debt, you should never pay for debt advice – it’s freely available from the following debt charities: National Debtline and Citizens Advice Bureau.

What if I can’t afford my loan repayment due to COVID-19?

The coronavirus outbreak is affecting everyone around the world and has put a financial strain on many. If you are struggling to pay back your short term loan, help is at hand. 

Overdrafts and COVID-19

If you took out your loan by using an authorised overdraft and are struggling to cope, the Financial Conduct Authority (FCA) has put some measures in place. Banks will be required to support you by:

  • Offering interest-free overdrafts of up to £500 for up to 3 months

  • Ensuring your credit rating won’t be affected if you use interest-free overdraft

  • Introducing a flat rate of interest on all overdrafts

Credit cards and COVID-19

Measures have been introduced by the Financial Conduct Authority (FCA) that allow you to request a freeze on credit card repayments. This is to give those experiencing a change in financial circumstances due to COVID-19 some breathing space. This won’t leave a bad mark on your credit history due to the exceptional circumstances. 

You can apply for a 3-month payment holiday, which can be ‘topped up’ to a total of 6 months; you have until 31 March 2021 to request your payment holiday. Make sure you’ve agreed to it with your lender before you stop paying!

If you can afford to make repayments it’s best to do so, as you will still be charged interest during this holiday period. You might end up paying more in the long run so only request it if you really need it. 

Personal loans and COVID-19

Many creditors are helping to support those who are struggling to make their agreed loan repayments by: 

  • Reducing loan repayments for up to 3 months

  • Offering payment holidays for up to 3 months

  • Ensuring payment holidays won’t affect customer credit ratings

Mortgages and COVID-19 

If you were up-to-date with your payments before the coronavirus crisis, then you will be eligible for a 3 month mortgage payment holiday, which can be ‘topped up’ to a total of 6 months; you have until 31 March 2021 to request this. However, if you were already in arrears before COVID-19, you will have to get in touch with your creditor to discuss your options.

Short term loan FAQS

Can I get a short term loan with bad credit?

Many lenders are offering short-term loans for people with bad credit. However, these loans are often for a small amount of money and usually have a fair short repayment period. Alternatively, you can arrange an overdraft with your bank even if you have poor credit. Having said this, the overdraft is likely to be low. 

How much is a short term loan? 

Short term loans can technically be for any amount. However, as the repayment period is often for the short term, they tend to be around anything from £100 up to £10,000. It really depends on your personal circumstances.

How long is a short term loan?

Technically, short term loans are designed to be paid back within one year. However, it really depends on what method you choose to obtain one. A personal loan might have a deadline of a year but a credit card is something you pay back monthly. Despite this, it’s always a good idea to pay back a short term loan as quickly as possible - this way, you’ll avoid hefty interest.


8 February 2021