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Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk

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Personal Loans vs a Short Term Loans

Long Term or Short Term?

First off, let's get the definitions right here. When we're talking about a "short term" loan, we'll be talking about loans similar to Payday loans; finance which is useful for emergency borrowing, or to get you through a tight spot.
When we're talking about a "personal" loan, we're generally referring to a longer term borrowing. Perhaps if you want to buy a new car, decorate your house or pay something off over a longer period.
The difference is abundantly clear, even when we advertise products like this. Advertising for the  Short term products will generally have much higher APRs and will be obtainable quicker in a lot of cases. The advertising will also be gauged towards paying back the loan in a quicker period. Standard personal loans, will typically have a reduced annual rate of interest, and be aimed at bigger purchases. Because of this, the application process for each type of finance is usually a little different. Personal loans for example may require a few more details to gauge an accurate credit rating (as you'll be expected to pay back the money over a number of years, typically)
So, let's look at these main differences and understand why they are different...

The Differences

1) Why is the APR higher on Payday style loans.

The short and simple answer, is that interest rates are designed to show you the cost of a product over a given and measurable amount of time; this allows the comparison of products on a side by side basis so you can weigh up the good, bad and the ugly.

For personal loans borrowed over a year, this APR calculation provides a valid and reasonable tool for comparing and discovering the cheapest loan product, most suited for your needs and credit score.

Short term loans and payday loans work differently to personal loans, and are lent over a much shorter period of time (typically less than 3 months). With this in mind, the risk is different for the lender and the way the lender recoups their money (and any unpaid loans) is different. Lenders need to charge a higher fee simply BUT because this fee and the loan amount are then strung out over a year to calculate the APR, the figures are dramatically skewed, to the proportions of a long term, personal loan. In reality short term loans are charged at a fair price... competition keeps that in check if nothing else.

2) Why are Payday loans paid quicker?

These products are designed to help customers out of emergency situations and so the market demands a quick payout.

Coupled with this, the risk for lenders for lending money over shorter term periods, with lower sums of money is less. Therefore the money can be paid out with less checks and less fuss. This means that your emergency borrowing can be in your bank in next to no time. If you're looking to buy a car or something bigger, then you may have to wait a few days, but then, that'll give you time to think about your purchase a bit longer.. never a bad thing :)

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