The short-term loan industry is often shrouded in mystery and confusion. This is due to false assumptions doing the rounds, as well as dated information stemming back to the time before strict regulations came into force. Here are some of the most common short-term loan myths debunked.
1. Short-term loan providers are rogue traders
There’s a common belief that those businesses that provide short-term loans are dodgy traders out to fleece their clients. While there may have been sharks operating in the industry in times gone by, this is no longer the case. The short-term loans sector is now heavily regulated by the Financial Conduct Authority (FCA), which means that lenders need to adhere to strict rules with regards to how they operate, while also offering complete transparency.
2. Expect hidden fees when you take out a short-term loan
People incorrectly assume that if you take out a short-term loan, the provider is in business to catch you out with hidden fees and extra expenses you hadn’t bargained for. They believe that this is all designed to trap you into a vicious cycle of debt. The reality is somewhat different, however. Since the industry is strictly regulated, loan providers are obliged to lay out all of their fees and terms and conditions, so that everything is 100% clear and transparent. Plus, once you have taken out a short-term loan, you can’t be sprung with new conditions or further fees.
It is only those people who fail to fully read the terms and conditions of their short-term loan contract who are often met with unexpected costs and conditions they hadn’t accounted for.
3. Expect high-interest rates
Many people are extremely wary of short-term loans as they think that the very high-interest rates and charges will catapult you into a never-ending cycle of debt. But, this isn’t necessarily the case. While you can expect to pay more interest for the convenience of a short-term loan compared to other loans (and also because this type of loan isn’t secured against any assets), fees and rates can actually be more affordable than you might think.
Crucially, regulations are in place to ensure that borrowers don’t get exploited. For instance, price caps mean that you won’t repay double what you have borrowed. Lenders are out to help you, where they’ll also supply you with information regards managing debt so that you have advice to hand should you need it.
The only time that costs might start to spiral out of control is if you fail to repay the loan back.
4. Expect to get hounded for repayments
Think of short-term loans and often the unscrupulous dealings of loan sharks might come to mind, but the two certainly don’t go hand in hand. If you’re worried about being hounded for repayments, with providers issuing threats or dodgy tactics to make you cough up, then you need to think again.
Regulations ensure that short-term loan providers are not allowed to employ underhand tactics to make you pay. Indeed, your repayment plan will be detailed in your contract so you know exactly when you need to pay and how.
However, if you do have any issues with repayments, it’s wise to contact your provider sooner rather than later. Additionally, if you do feel that you are being treated unfairly by a loan provider, contact the Financial Conduct Authority or Trading Standards for advice.
5. Anyone can get hold of a short-term loan
While it’s true that short-term loans tend to be easier to acquire than other loans, there’s no guarantee that anyone can get one. Before the industry was regulated, it was certainly easier to obtain such a loan, but this is no longer the case. Short-term loan providers need to rigorously scrutinise every application they receive, making sure that each applicant is capable of paying the loan back. Only then will the loan be approved. Indeed, since stricter regulations have come into place, the number of short-term loan application rejections has increased. This is to safeguard both the consumer and the loan provider.
6. Short-term loans are bad news for your credit rating
Many people shun short-term loans as they worry that they’ll adversely impact their credit score, but this isn’t necessarily true. In fact, if you show that you are a responsible borrower and can pay the loan back on time, this can have a positive effect on your credit rating. It is only those borrowers who fail to keep up with repayments that will notice their credit rating worsen.
7. Short-term loans are only for very poor people
There is something of a stigma regarding short-term loans. They’re often viewed as a bit of a seedy form of financial means for those who are extremely poor or in a financial mess. This isn’t actually true. Indeed, people of all walks of life take out short-term loans with studies showing that you’re more likely to acquire this type of loan in the UK if you’re middle class!
Short-term loans are typically used in emergency situations or when unexpected expenses crop up that you haven’t budgeted for. People often take out a short-term loan to tide them over until they get paid or when other funds become available. In fact, in order to get a short-term loan application approved, you already need to be in employment, so it’s far from being a financial source for down-and-outs.