Why Is Short-term Loan Connected With High Interest?


You may have found that the finest UK payday loans are available at APR rates of more than 1000%. It is a scary and off-putting figure for looking for credit. Generally, payday lenders need to publish APR because it helps to use an online loan calculator or daily interest rate to get an idea of how much the credit would actually cost. 

Payday loans are short-term loan and even the amounts requested is small. The lenders charge high interest to earn sufficient income and cover service costs as the loan can accrue interest only for a brief period.

For example, if you borrowed payday loans for 2 to 3 months it means the lender will have 2 to 3 months to recover loan supplying costs, whereas a credit lent for more than 25 years means the bank has more than two decades to recover service costs. 

Reasons why short-term loans are costly

  • Short time – Short period loan means you borrow for short time and repay every month. The repayment includes a part of the borrowed amount [Principal] and interest on the total amount borrowed. The interest accrues on a small portion of your monthly installments. 
  • Small amounts – Another reason for high-interest rate for a short-term loan is the borrowed amount is smaller than personal loans or mortgages available from banks i.e. 5% of £100 is £5 but 5% of £1000 is £50. The interest rate is the same, but the value differs, so interest rates are high for small loans. 

Sometimes, people with bad credit find themselves in trouble water even if their need is small. At Loan Pig in the UK, small loans for bad credit are available for 2 months minimum and 12 months maximum with a fixed APR of 292%. 

The annual Percentage Rate shows how much you will repay on the borrowed amount for specific months. Payday loans carry a cap of 292% pa, which means 80p per day on £100 borrowed. The figure is less scary than APR quoted on the lender’s website. So, use the lender’s website to see exactly how much is needed to repay based on your borrowing time and amount. 

Many mainstream lenders can reject your loan application because of a bad credit score but short-term lenders recognize the reasons you are experiencing bad credit. The bad credits stay on your record for six years even if your current situation is different.

Bad credit doesn’t mean you cannot afford to repay. It may seem unfair to get excluded financially from the same credit opportunities associated with a good credit score, especially when you are in an emergency. 

There are online short-term loan lenders. The application process is quick and cash is transferred promptly via FPS [fast payment services]. You can start using a short term comparison site. It is just like comparing hotel rooms or car insurance that helps to identify the best deal for short-term loans. 

It is wise to stay away from high cost short-term loans. Only borrow when genuinely needed and you are confident to repay it or you can get trapped in a debt cycle.

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