The Impact of Short-Term Loans on Your Credit Score

The Impact of Short-Term Loans on Your Credit Score

It’s becoming more difficult to stretch your income further throughout the month to meet your needs – which can then be made more difficult if you’re faced with a bill that you’re not expecting. This is where short-term loans can help. A variety of loans offered by alternative lenders, like same day loans for bad credit, payday loans, and emergency loans can all come in useful if you need money urgently. But can they have an impact on your credit score? Read on to find out…

Types of short-term loans

Short-term loans are exactly that, funds that you will borrow from a lender, that will be paid back over a short amount of time – the period usually ranges between a month, to a year depending on the loan and lender you choose. Here are a few of the most common types of short-term loans that you will come across.

Payday loans: These loans are used to help tide you over until payday when your income won’t stretch until the end of the month, due to an expense that you weren’t expecting. They tend to be smaller amounts and they usually need to be paid back within a month. They come with some of the highest interest rates.
Same day loans: These loans can be a good option if you’re looking for money quickly to deal with an emergency that needs to be dealt with immediately. After you’ve completed the simple application, you can benefit from funds in your account on the same day in most cases.
Bad credit loans: There are short-term loans that you canbenefit from even if you have a bad credit history. Most short-term loan, alternative lenders make decisions based on affordability, rather than how you’ve managed your money in the past.

What is a credit score?

So, where does your credit score come into this? Your credit score shows lenders how you’ve managed your money in the past. It’s measured from 0-999, the higher the score, the more capable you will appear to lenders when it comes to managing your finances. Your credit score shows lenders how creditworthy you are, and can have an impact on approval, and how much interest you’ll pay. There are a few factors that can have an impact on your credit score, like whether you’ve missed payments or defaulted on loans, or you’ve applied for multiple forms of finance in a short space of time.

How does a short-term loan impact your score?

Generally, if you have done your research and chosen a loan that suits you, and that you can afford to pay off regularly, your credit score should remain in good health. But there are a few risks that come with choosing a short-term loan that could potentially impact your score, such as:

Missed repayments

Short-term loans need to be paid back over a short amount of time; this means that it’s more likely that you may not be able to meet the repayment terms that come with them. This is whyresearching and choosing a loan that is most suited to your financial situation is crucial. If you miss repayments – just like any other type of loan – your credit score will plummet,and you will appear as a risk to lenders in the future.

Regular applications

It can be tempting to apply for a few loans at once just in case your application isn’t approved by your preferred lender, but this can be detrimental to your score. Applying for multiple forms of finance shows on your credit history, and if you apply regularly, or for a few loans at once, a lender will assume that you are in desperate need, and this will show that you may not be as trustworthy when it comes to repaying your loan.

Can you improve your score with a short-term loan?

On the other hand, if you’re choosing a short-term loan to deal with an emergency, and you know you’re going to have the money to pay for it on time and in full, it could help improve your score too. Whilst you shouldn’t choose a payday or short-term loan solely as a way of building a credit score, if you need help and you show that you have repaid your loan in full in the agreed time frame, you can build a better credit score for the future.

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