What Are Small Loans and When Should You Use Them
If you’ve suddenly encountered a home repair or a car breakdown without an emergency fund to rely on, you’re likely to have struggled with finding the right loan. Thanks to fintech innovations and open banking systems, which allow lenders to access real-time financial data, you can now take out a loan during a financial emergency with confidence.
One such loan you can take to manage unforeseen expenses is a small loan. These are typically personal loans of small amounts that can be useful as a stopgap solution to meet urgent financial needs. This could range from an urgent vet bill to an emergency trip. Small loans have short repayment periods, need no collateral and are widely available.
Short-term loans, payday loans, and unsecured personal loans are a few examples of small loans. If used responsibly and repaid on time, they can be a lifeline during an emergency. They can also help you rebuild your credit score. Consistent repayments on small loans have seen credit scores go up by 20-30 points in a span of 6 months.
So what are small loans, and when should you consider borrowing one?
1. A Brief Overview of Small Loans
Small loans, as their name suggests, are loans of small amounts, typically ranging anywhere between £300 and £2000, though some lenders offer even higher amounts.
People view small loans as an affordable credit option. They’re quite popular with the below-40s demographic as they have lower interest rates than payday loans. This makes them cost-effective and particularly suitable if you have a fair credit rating. However, it’s also an equally good option for those with poor credit if they borrow a small loan from ethical and FCA-regulated lenders like Salad. Salad small loans have helped many NHS workers meet emergency expenses amidst changes in pay, which is a testimony to the efficacy of small loans.
Small loans come with a fixed interest rate and have a fixed repayment schedule. This allows you to use smart budgeting techniques to plan for repayments comfortably. That way, you don’t have to worry about fluctuating interest rates affecting your monthly finances or loan repayments.
2. Types of Small Loans Available to Borrowers
Small loans are widely available and are easily accessible. From ethical and inclusive lenders to banks, most financial lenders offer some form of small loan. Below, we list some of the most common types of small loans available to borrowers.
- Payday Loans
Payday loans are short-term loans that you need to repay by your next payday. They are to be used cautiously and are generally high-cost credit that is best left as a last resort when you’ve exhausted all your borrowing options.
- Unsecured personal loans
Unsecured personal loans, as the name suggests, are loans that do not require collateral. These are great to consolidate debt, make a one-time purchase, or for a home improvement project.
- Short-term loans
These have slightly longer loan repayment periods when compared to standard personal loans. This could be anywhere from less than a year to up to 2 years. This gives you time to make repayments comfortably, but these also come with higher interest rates.
- Salary advance:
While these do not technically qualify as a loan, they’re a viable alternative to small loans where you do not incur any interest. A salary advance is simply an arrangement made with your employer to access a portion of your wages before payday.
- Direct lender loans
Small loans from direct online lenders like Salad can offer you fair and ethical credit options due to their use of open banking systems. This helps them access real-time financial data to offer you small amounts quickly, sometimes within a matter of hours, making them perfect to deal with unforeseen expenses.
3. The Dos and Don’ts of Small Loans
Small loans are convenient and fairly safe if used correctly. Like any other loan, they need to be used responsibly, no matter how small the amount. That said, there are some situations where you might want to consider alternatives and avoid them altogether. Here are some of the dos and don’ts of small loans.
a. When you can use them
- Emergency expenses, urgent repairs, vet bills, appliance breakdowns, etc.
- To manage financial gaps in the period before your next payday.
- You want to avoid overdraft fees
- Temporary financial crunch
b. When you should avoid them
- Do not use them for non-essential expenses
- Avoid it when the interest rate being offered is relatively high
- If you’re already struggling with existing loan commitments
- There are better alternatives you can consider
- It’s not an urgent expense and can be managed with smart budgeting
Conclusion
Small loans come with numerous benefits, as they are disbursed quickly and have minimal paperwork. You can access these loans even if you have poor credit standing. However, it’s important to remember that missed payments on these loans can prove costly and potential misuse of these loans can impact your finances. Consider borrowing from ethical lenders like Salad that can offer you fairer terms and conditions and endorse responsible lending practices.
If you’ve suddenly encountered a home repair or a car breakdown without an emergency fund to rely on, you’re likely to have struggled with finding the right loan. Thanks to fintech innovations and open banking systems, which allow lenders to access real-time financial data, you can now take out a loan during a financial emergency…
