Can I get a short-term car loan?

Are you living life in the fast lane?
 
When time is of the essence and you’re used to going from 0 to 60 in seconds, the thought of being tied into a car finance agreement for the next five years might leave you in a cold sweat.
 
Well, let us mop that brow; short-term options are available.
 
Like every type of finance, these condensed loan terms have their pros and cons – and they’re not available to everyone – but if you’re looking to make the switch from car buyer to owner in 12 months or less, this might be the car finance option for you.
 
What are you waiting for? Let’s talk short-term loans:

What are short-term car loans?

As their name suggests, short-term car loans are a type of finance with a term of 12 months or less.
 
But what does that mean in practice?
 
Car finance is a serious commitment to regular repayments for a set amount of time. If we take Hire Purchase (HP) finance as an example, these loans typically last between one and six years.
 
Cost is the driving factor. No matter whether you’ve bought a pre-loved model or one that’s just rolled off the factory floor, your pride and joy is likely to be one of the biggest purchases you’ll make (until that private island you’ve got your eye on!) That’s why spreading the cost over time can help; a £10,000 car can suddenly feel a lot more affordable when you have 72 months to pay for it.
 
Long loan terms aren’t right for everyone, especially when they’re secured against the vehicle. Once you’ve signed on the dotted line, you’ll have to deal with added interest and restrictions until the loan term ends. Short-term loans offer an alternative way forward if you want to avoid tying yourself to a long-term commitment, however this may come at higher costs across this period.  

Remember, finance agreements aren’t a one-size-fits-all. What works for most people doesn’t matter, your loan term needs to suit your personal circumstances, priorities, and budget (it’s all about you, baby!)

How short is short-term?

When we talk short-term, we typically mean a finance agreement that lasts 12 months or less.
 
Different lenders will offer different loan lengths, but you might even be able to find loans with payments split over three, six, or nine months.

What are the benefits of short-term car loans?

So, why would you want to pay off your loan in three months when you could spread the cost over three years instead?
 
Here are a few of the pros of short-term loans:

You could save money on interest

When it comes to car finance, time is money. In return for providing your loan, most lenders will ask you to pay interest – and it adds up over time. Generally speaking, the longer your loan term, the more interest you’ll pay.

You could have access to newer cars sooner

Had your head turned by the latest tech or seen that your favourite manufacturer has launched a new model? With a car finance agreement that lasts less than a year, patience could be a thing of the past. Pay off your loan in just a few months, and you could sell or trade in your current car and get behind the wheel of something shiny and new in next to no time.

You might enjoy more flexibility

Marriage, parenthood, car finance – okay, the first two take commitment to the next level, but your loan agreement can still lock you into a long-term relationship with your lender. If you’ve got a secured type of finance like HP or Personal Contract Purchase (PCP), the lender will remain the car’s legal owner until your loan term ends. That means you can’t sell it, trade it in, or even respray it hot pink and add a top-of-the-range set of speakers without settling the finance first. Choose a short-term loan instead and you could add those go-faster stripes in a matter of months.

It could be more cost-effective

Depending on the loan type you have, a short-term loan could be more cost-effective, especially if you plan to return the car when the term ends. If you’ve gone with a newer model, you probably won’t have to worry about paying out for repairs or even booking it in for a MOT or service before it’s time to hand it back to the lender.

What are the potential drawbacks of short-term car loans?

Of course, it’s not all sunshine and rainbows, otherwise we’d all have loans that last six months!
 
When it comes to the downsides of short-term loans, there are three main points to consider:

Your monthly payment can be higher

It’s time to flash some cash. Depending on the type of finance you have, short-term loans can come with higher repayments. Take an HP loan of £5,000; you’ll need to pay a lot more each month to pay it off in five months than if you split the cost over five years.

You might have a higher interest rate

Loan term length isn’t the only factor that affects your interest rate, but short terms can come with higher APRs. Lenders want to see some return on their investment after all; if you’re only going to be paying interest for six months, don’t be surprised if they ask you to pay a high rate of interest to compensate for the money they’ll be missing out on.

Car depreciation could be a downside

Depreciation is more like the hare than the turtle, it starts out fast and then slows over time. A brand-new set of wheels will come with the highest rate of depreciation so you could be at risk of ending up in negative equity (when the loan is worth more than the car) as it loses value quickly over those first 12 months. That might not be a problem if you plan on keeping your new pride and joy for a while, but you could be left out of pocket if you need to sell or make a trade.

What are the eligibility criteria for short-term car loans?

Every lender operates slightly differently and has its own eligibility criteria, but short-term loans are typically restricted to borrowers who:

• Have a large deposit
• Have a good or excellent credit score
• Have a high disposable income

Credit checks and affordability checks will be part of the loan application process. If your budget is already being squeezed (cost-of-living crisis – we see you), then a high monthly car payment could be a stretch too far, even if you will only be paying it for six or nine months.

What other options are available?

The good news is that there are a wide range of car finance options available – here are a few alternatives worth exploring:

Personal loan

If you don’t want to be stuck with a car you can’t sell or modify for several years, consider a personal loan. This type of finance isn’t usually secured against your car – providing you keep making payments – you’re free to do whatever you like with your new wheels as soon as you’ve used the loan to pay the seller.

Credit card

Not all dealers will accept payments by credit card (and you’ll be restricted by your credit limit), but chip and pin might be the way to go if you have a 0% interest rate card. It can take more discipline as you’ll need to manage your monthly payments yourself – and make them all before the interest free period ends – but you could also benefit from the flexibility. Need to cut back in December? No problem as long as you overpay in January.

Personal Contract Hire (PCH)

If car ownership isn’t on your vision board, PCH or leasing could be the best option for you. You’ll pay a fixed monthly amount (usually for between two and four years), but when the lease term ends, you’ll simply hand the car back. Terms and conditions apply – think mileage restrictions and excess damage charges – but you could get to enjoy the perks of car ownership without the hassle of selling it.

Car subscription

A newer option on the market, car subscriptions work a lot like leases but can be even more flexible. You’ll typically pay a fixed monthly fee to use a car with all the extras (except fuel) included. It’s a one-stop-shop – insurance, maintenance, breakdown cover, and more will be included in your monthly fee – and can be pricey, but it could mean you can switch up your wheels every two or three months.