You’ve almost certainly been there. Months go by when your carefully laid household budget is ticking along like clockwork. Then something comes right out of the blue, demanding expenditure you never imagined, and your budget is thrown into the air.
Some of these might be:
- the central heating system breaking down in the dead of winter and needing to be fixed straight away;
- your car is involved in an accident and needs to be repaired;
- you pet needs emergency veterinary treatment and while you have pet insurance, you need to pay the vet’s costs first and then claim them back; or
- you’ve seen a cut-price deal on something you been meaning to buy – but the deal is only good if you buy it now.
If your planned budget doesn’t stretch to it, you might choose to do borrow the money. In such a keenly competitive market, loans and credit are on offer all over the place. But each comes with its own set of repayment terms and, most important of all, the rate of interest that determines just how much the borrowing is going to cost.
How do you choose between those on offer? One of the most convenient, ready to hand sources is probably your credit card. But what if it is already maxed out or dangerously close to your spending limit?
Then it might be time to look at alternatives such as personal loans or short term loans – but which option is the most suitable for you?
These are widely advertised and you are likely to discover quite a range of different interest rates in this especially competitive sector of the market.
They have the advantage of offering a relatively substantial unsecured loan – up to £15,000, for instance – with repayments spread over several years, so that you are able to budget for the known expenditure each month.
You may need to pay a set up fee when your personal loan is approved; you are likely to need a healthy credit rating; and, there may be a financial penalty if you decide to repay what you’ve borrowed before the originally agreed date.
Of course, you might not want such a large amount of money offered by a personal loan. Indeed, the minimum size of a personal loan might be far more than you actually need (they tend to start at £1,000+).
Although you might have secured an apparently attractive rate of interest, therefore, you might end up paying over the odds for a loan that is bigger than you need – and spread over a longer period than you had hoped. The fact that there is a penalty for repaying your personal loan early hardly makes this option any the more appealing.
Short term loans
When your need is for a relatively small loan amount – to meet the type of emergency described at the beginning where the costs may be £1,000 or under – you are also likely to need it only on a very short term basis.
Even though the rate of interest might be higher than with a personal loan, overall this may be a more cost-attractive option for you. This is because:
- you are able to borrow a more realistic amount, so are not over-borrowing and running up unnecessary debt;
- the short term loan can be repaid over a shorter amount of time – typically between one to 18 months (depending on the provider) – so while you are paying a higher interest rate, you may typically be paying less overall compared to a personal loan;
- if you find you can repay the loan early, with the more reputable short term lenders, you will not be charged a penalty fee.
Whatever loan option you decide to use, always make sure you fully understand the associated costs and charges so you can make an informed decision as to the affordability of the loan.