From Adviser Guide: Short-term finance
Q: What are the pros and cons of different short term loans?
Most short term loans are in essence similar. Where these loans usually vary is with regard to interest rates, fees and charges.
Interest rates are usually quoted as a rate per month, according to Alan Margolis, head of bridging at United Trust Bank.
Often interest is included in the facility so that monthly interest payments do not have to be made.
Borrowers and their advisers need to take into account whether interest is rolled up or retained, the former is more cost effective for the borrower, Mr Margolis added.
Some lenders calculate interest daily – others apply monthly rests.
There will be differences in the fees applied, the cost of the valuation(s) and legal fees and whether there are early repayment charges.
For commercial purposes the speed of decision and the flexibility of the underwriting approach which supports professionals is a pro, according to Steven Nicholas, chief executive of Tiuta.
The potential downside, Mr Nicholas warned, is that such loans are sometimes slightly more expensive due to the greater risk involved.
With development finance, Mr Nicholas said one potential con is that the loans are not as easy to manage as payments are subject to the valuation of the property, the value of the work that has been completed, etc.
Bridging loans involve many checks and fees, warned Paul Aitken, chief executive of Borro.
Lawyers’ fees, surveyor’s fees, affordability checks and credit checks are among the costs and procedures borrowers face, leaving a credit footprint if refused. Terms are fixed and there is a penalty for early exit.
Mr Aitken said the loan is typically secured against an asset such as property, therefore severe penalties are incurred if interest payments are missed and the client could lose their home.
With personal asset loans, Mr Aitken said the process was straightforward and flexible with speedy access to funds and no need for monthly interest payments.
While the client runs the risk of losing their personal asset, if they fail to repay in the time agreed, Mr Aitken said they will never owe more than the asset is worth.
As lending is secured against lifestyle assets rather than bricks and mortar, Mr Aitken pointed out there was no negative equity.
In the case of guarantor loans, Mr Aitken said applicants can receive up to £300 within 72 hours.
As a guarantor is provided, Mr Aitken said there were no credit checks conducted on the individual taking out the loan and the lending decision was not based on a credit score.
However, he said the process was lengthy and required someone other than the individual taking out the loan to assume liability. High interest rates and administration fees also apply, he added.
Mr Aitken said: “With all short-term loans, individuals should ensure that they only want the finance for a short while otherwise the loan could prove costly.