If you are looking to borrow an amount as small as a £500 loan, you probably need it for an immediate expense. Fortunately, many banks and financial institutions in the UK offer small loans in both secured and unsecured variants. However, before you decide to borrow, here are some details you ought to keep in mind.
Small Loans and Short-Term Loans – Basics
When you apply for a small £500 loan, the lending institution will take a while to confirm your loan eligibility. After it verifies all your application details, it will directly deposit the requested amount in your bank account.
The amount deposited by the lender has to be paid back in the stipulated time. Borrowers have to make a monthly payment which includes interest. Generally, you will be allowed to either repay the amount quickly or extend your loan period for a few years. Loans for which the tenure lasts less than one year are known as short term loans.
However, if the tenure lasts for more than a year, the loan is called a personal loan or a small loan. If you choose to borrow a £500 loan, it will most likely be a short term loan because of the low amount. Subject to credit policies of individual lending institutions; however, the tenure may be extended.
Where can you get Loans?
A small £500 loan can be availed from the following lending institutions:
Banks and Building Societies
Short term lenders
Peer to peer lending websites
Since a £500 loan is a minimal amount, most lenders will not require extensive documentation from your side. They may overlook your credit score, so long as it is not unreasonably low. Here are a few documents you ought to have handy while applying for a £500 loan:
Proof of Address
Proof of income
Proof of citizenship
Acceptance to allow the lender to check Credit reports
Interest Rates for Short Term Loans
UK financial institutions allow borrowers to apply for both small and significant amounts. The interest rate for each of those amounts varies with each bank and each loan type. While loans in the range of £7500 to £15000 attract the most beneficial interest rates ranging from 3 to 9%, this does not apply to all loans.
For a £500 loan, the interest rate is typically exorbitant. Some banks can also charge interest of 100% or higher. If your short term or small loan is a payday loan, monthly repayment amount can be very high, primarily because of the interest rate.
The first thing you must do after deciding to borrow a £500 loan is to compare the lending rates from different lenders. Also, check the repayment tenures to find where you can pay the lowest interest.
The interest is usually a percentage of the total amount that lenders add to the principal amount as the cost of borrowing. If the loan lasts for a year or longer, it is calculated annually. However, for short term loans, the rate is adjusted for the number of months in the tenure. Lenders must be transparent with their interest rates and other fees associated with the loan. Even if the interest charged is variable, the lender must display the variable range as APR (Annual Percentage Rate).
As a borrower, you must be aware of the fact that the APR displayed by a lender on their website is usually just a representative APR. This means that about 51% of the total loan applicants receive the loan at this APR. To other borrowers, this APR may be higher or lower.
Repaying a £500 loan is relatively straightforward. Before borrowing, here are a few basic pointers about loan repayment that you ought to be familiar with.
Typically, the interest rate is fixed and accrues over the repayment tenure. This amount, along with the original principal, is divided into fixed monthly payments. On a specific day every month, these payments are made either through direct debit or standing orders.
Small or short term loans can instead be paid weekly or in bulk if the borrower is a salaried individual. Continuous Payment Authority is another agreement that allows lenders to withdraw the due amount from a specified borrower account. The borrower is responsible for maintaining appropriate funds in the listed account.
Failure to repay the loan on time, or skipping monthly payments can involve adverse monetary fines for the borrowers. Resort to a loan only if you are confident of repaying the loan on time.
Short Term Loans – Impact on Credit Scores
Regardless of the type of loan, credit reports are considered a crucial part of the criteria for eligibility. A significant factor associated with a short term loan is affordability risk. An affordability risk is an assessment of whether the borrower will fail to repay the loan on time and sink further into monetary debt as a result of their short term loan. Opting for a £500 loan can make the borrower’s financial situation worse.
When you apply for a small loan or a short term loan, lenders will take special care of the affordability risk factor associated with the credit report. They may refer to past debts, repayments, current accounts, standing debts, and unpaid loans. Declarations or judgments of bankruptcy also play a significant role in credit assessment. In short, small loans are easier to acquire if there is no affordability risk associated with your profile.
They tend to boost your credit score if you repay them on time. Before taking a £500 loan, carefully consider all the costs that you will have to repay over the tenure of your loan. Borrow responsibly to avoid financial hassle and meet your small and unanticipated expenses with no worries using short-term loans.