With all the furore surrounding the high APR and roll over charges of payday loans recently, a gap in the market has emerged for a new type of loan – the short term loan, and companies are bending over backwards to cash in on your financial predicaments. But are they any better than payday loans? We look at the differences between the two.
A payday loan is a set amount, borrowed by you, for upto a month, typically around £400 for first time customers, with the APR of approximately 4214%.
If you are wondering why the APR is so high it is because APR is a measure of annual interest and assumes theoretical compounding. Payday loans are taken out for between one day and a month and the shorter (and lower cost) these loans become, the higher the APR becomes.
Payday loans has come under much criticism recently and one company – Wonga has always maintained a fair policy of not adding to a customers debt by working with them to ensure they try to keep to scheduled payment days and not continually rolling over their debts.
Not all payday loan companies are this trust worthy however and some vulnerable customers have got into a downward spiral of paying the minimum amount each month and never fully being able to pay off the original amount. And here is where the short term loan companies come in.
Short term loans are designed to be split into convenient repayments based on your pay frequency. Unlike one-month loans, there are no roll-over charges because the loan is designed to be repaid over a longer period of time. You can take advantage of the longer duration to pay back. You may also choose to have the loan for a shorter duration than the contractual term.
Early repayment costs you nothing and saves you money that you might otherwise pay towards interest. Short-term loans typically do not extend beyond 6 months and are devised to be lighter on your budget as you can repay your loan in easy parts, rather than have one single amount taken out at the end of your pay.
Short term loans are not meant to be payday loans because they are flexible in the sense that you get longer repayment terms and fixed instalments that you can be prepared for. An added bonus is that you can always repay early and save on interest.
Some companies offer an optional Express Cash transfer (£15 transfer fee deducted from your loan) if you should need to get the money deposited quickly into your bank account. The objective of a short term loan is to give you more freedom with your monthly budgets so you can pay back your loan comfortably.
These products are also designed in such a way that your repayment term reflects your pay frequency, allowing for easy budgeting. The instalment plan will not cost you roll-over fees and a single instalment will not be more than 50% of the borrowed amount.
So are they a better way of borrowing money? Well the APR is a little less at a typical 3378% but when you work out a representative example it is here that you see the real difference between a payday loan and a short term loan.
If for example you borrowed £200 from a payday loan company (Wonga) for 30 days, you would pay back in interest £66.31, so the total amount would be £266.31.
If you borrowed £200 from a short term loan company (Lending Stream) for 6 months, the interest would be a whopping £240 making the total amount payable £440. My advice is that if you need to borrow money ask your family first, or a good friend, or if you are in real debt, go to the Citizens advice. But I would not recommend these short term loans.