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What is a short-term personal loan?

What is a short-term personal loan?

Whether you’ve been stung with an unexpected bill or your car has broken down, we’ve all been in situations where we need cash fast. And a short-term personal loan may be one solution you’ve come across.

However, while getting access to fast cash can offer immediate financial relief, it may also result in a slew of long-term issues.

Let’s explore what a short-term personal loan entails, and some of the potential benefits and costs involved.

What is a short-term personal loan?

A short-term personal loan, also known as a payday loan or a fast/instant cash loan, is a type of loan in which an individual can borrow a smaller lump sum (usually up to $2,000) for a shorter-than-average loan period (between 16 days and one year).

Short-term personal loans typically do not charge interest, but they do charge fees. As this structure differs to that of traditional personal loans, short-term personal loans generally carry higher fees than average.

The term ‘fast cash loan’ relates to another common feature of this loan type – a short approval window. Some short-term personal loan lenders may advertise that you’ll receive funds within 60 minutes of applying. Some also advertise access to funds within 24 – 48 hours of a successful application.

Short-term loan lenders also advertise easier eligibility criteria, specifically targeting those with poor credit scores. Would-be borrowers with bad credit history needing access to cash may turn to these loan providers as an alternative to the big four banks and other ‘traditional’ lenders, who may be more likely to reject their loan applications due to their credit report.

What can short-term personal loans be used for?

As mentioned above, short-term personal loans are typically sought after by those in need of fast cash. This may be for a range of issues, such as:

  • Unexpected bills, such as energy bills or gas bills
  • Urgent mechanical repairs, such as for a car, dishwasher or washing machine
  • Costs related to a medical emergency

An individual in need of a fast cash loan may have unexpectedly lost their main source of income and be struggling with essential costs, such as groceries. Whatever the reason, short-term personal loans typically don’t set strict requirements around the purpose of the loan as a traditional lender might. Meaning, if you need fast cash, the lender may not ask too many questions as to why.

What fees may be charged on a short-term personal loan?

One of the most prominent features of a short-term personal loan is, unfortunately, the higher-than-average fees they typically carry. In fact, ASIC’s MoneySmart website warns against these very risks for payday loans, noting that:

“There are cheaper ways to borrow money when you need it. If you're getting a payday loan to pay off another loan, talk to a financial counsellor. It's free and confidential.”

In Australia, there are laws dictating the maximum fees a payday lender can charge a customer. According to ASIC, these caps are as follows:

Type of feeCost cap
Establishment feeMaximum fee is 20 per cent of the amount borrowed
Monthly service feeMaximum fee per month is 4 per cent of the amount borrowed
Government feeCovers any government duties - most lenders don't charge this
Dishonour or missed payment feeCharged if you don't have enough money in your bank account to make a scheduled repayment
Default feesCharged if you don't make a repayment by the due date - the maximum you can be charged for default fees is double the amount you borrowed
Enforcement expenseCharged if you default - to cover the cost of recovering the money you owe

Source: MoneySmart.gov.au.

What are the benefits and risks of a short-term personal loan?

While there are warnings attached to this type of loan, they may still offer relief for some customers in financial stress.

For someone in desperate need of funds, the immediate financial relief that comes from a payday loan may be invaluable. However, the potential costs of said loan can outweigh this, as a customer may find themselves paying through the nose in fees, like those listed above.

For example, on a hypothetical 6-month $2,000 payday loan, a customer may be charged:

  1. A $400 establishment fee, and
  2. A $80 monthly service fee, totalling $480 over 6 months.

If the customer is charged no other fees, they’re still paying an additional $880 on a $2,000 loan. This means the customer ends up paying fees that amount to 44 per cent of the principal sum.

If the customer believes they can service these costs, then this may still be an option worth considering. It’s just a matter of being made aware of all potential costs and balancing this against their budget. For those already in financial hardship, this type of loan may have an adverse effect on their personal finances.

Pros of short-term personal loans:

  • Access to fast cash
  • Higher chance of approval if customer has bad credit history

Cons of short-term personal loans:

  • Higher-than-average fees and costs
  • Repayments may lead to further financial stress and/or hurting credit score

What are some alternative fast-cash solutions?

When you’re in need of immediate funds, it’s understandable that short-term personal loans may be an option worth considering. However, there are other fast-cash solutions you may be interested in.

  1. No Interest Loan Scheme (NILS). The NILS allows families and individuals on low incomes access to affordable credit (up to $1,500) for essential goods and services. There are no fees or charges attached.
  2. Centrelink advance payments. You may be eligible for an advance on your Centrelink payments from the Australian Government. There are also no fees and charges attached.
  3. 0 per cent interest credit cards. 0 per cent interest credit cards may allow customers access to credit with zero per cent interest charged for a set period of time (up to 24 months). This can allow those in need access to credit and breathing room to make repayments. Keep in mind that the purchase rate will revert from zero to anything between 7 – 24 per cent, so it’s important you pay off your balance in this zero per cent interest period. There are still risks involved with taking out a credit card, as well as fees and costs, so it’s worth weighing these up before applying.

  • If you’ve struggled with getting approval for traditional personal loans or credit cards due to your credit history, it may be worth boosting your credit score. Read five ways to boost your credit score now.

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This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.



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