Short-term loans are usually offered without a credit check and can provide instant relief from a financial emergency.
These credit facilities are especially designed to help you resolve financial emergencies quickly. However, they may not be as beneficial as expected in all situations. For ensuring that you will make the right financial decision when the need arises, you should learn more about these loans and evaluate their benefit, cost and risk carefully.
Here you will find all the information and advice which you require to make the best choice.
How do short-term cash loans work?
These are unsecured credit facilities which have a short term. You can borrow a small amount of money, typically loans up to AU$1,000. The term can range from two weeks to several months. In most cases, you will have about a month to pay back what you owe. Usually, when you take out the loan, the lender will require you to write a check for the principal amount plus interest and fee charges. In this way, they are able to get their money automatically on the due date or an earlier date upon your request, if this is a possibility under the signed agreement.
Most short-term micro lenders in Australia give you the opportunity to extend the term of the loan if you cannot pay back what you owe on time. This may offer temporary relief, but the lender will continue to charge interest and so your debt will grow. Additional fees may apply as well.
These loans are available without a credit check
Even if the lender runs one, it is not necessarily taken into consideration when the final decision is made. This makes these credit products easy to get even for people with bad credit. The main requirement is for you to have sufficient income to repay the loan.
How much do short-term loans cost?
These are some of the most expensive loans which you will find in the Australian finance market. The annual percentage rate, which includes interest and fees, is usually several hundred percent, even though certain caps may apply.
For small loans up to AU$200 with a repayment term of 16 days, you may have to pay back AU$240 in total. If you do the math, you will see that the APR in this case is over 400%.
What are the risks of using short-term cash loans?
The main risk of these loans comes from their high cost.
It makes them more difficult to repay especially if you are struggling to cover all of your expenses with the income which you earn. The short repayment term makes the risk of default higher. For these reasons, the short-term loans should be used only in cash emergencies when there is no other option. If your car breaks down all of a sudden, for instance, and you need to fixt it in order to be able to travel to work and make money, then the use of such a credit facility is justified.
If you have constant budget management issues, however, these loans can only make your situation worse.
Banks and other financial service providers take strict measures to discourage customers from using bad checks. That is why if your check for repaying the short-term loan bounces, you can be penalised with a hefty fee. If this happens several times, the bank may refuse to work with you. In case of default on the loan, the lender can take your case to a debt collecting agency and sue you eventually to recover the incurred losses. Your credit file can suffer serious damage and you may have to deal with even more expenses.
The extension of the short-term loan is not an effective solution either. You can accumulate a considerable amount of debt in this way.
Short-term loans from the banks
Traditionally, these credit products have been offered by smaller independent micro finance companies. The banks are making cautious steps into entering these industry as well. In this situation, it is natural to ask yourself whether borrowing from a bank will be better.
The reality is that the short-term loans which banks offer do not differ much from those provided by other lenders in terms of features, cost and repayment term and structure.
These credit products are quite different from the traditional ones offered by banks.
Additionally, you have to take into account the fact that it is easier for banks to get the money owed to them. This is because they have access to transaction and account information and can operate with accounts directly. If you use a loan which is repaid with direct debit order, the bank can withdraw the money immediately after you have a transfer to your account.
An independent lender, on the other hand, will not be that fast. Hence, in some cases, it may be more challenging to deal with a bank than with a small finance company.
The best strategy which you can adopt is to compare short-term loans from different lenders and pick the one with the lowest cost and most favourable repayment terms and conditions.
Are short-term cash loans the only solution?
There are other things which you can do to resolve a cash emergency and to manage your budget effectively. You can keep cash aside to use in case of emergency.
You can put the money in a savings account so that it earns interest.
You can also have an emergency credit card with longer interest-free period and lower cash withdrawal cost.
You should work towards improving your credit history so that you will be able to get a traditional unsecured loan quickly if the need arises. You can also consider peer to peer loans which are available from private persons via specialised online platforms.
If your income is not sufficient for covering all of your expenses, you should think of long-term solutions. You can make extra money if you take up another job. You should also try to negotiate the repayment of existing loans so that you can increase your disposable income.
You should always manage your finances and accounts carefully to avoid paying extra fees and charges.
Making a Decision
You can use a short-term loan to get rid of a financial problem when there are no other options available. However, you should know that these credit products are not designed for regular use.
They are fast and easy one-time solutions.