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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.

Did you find this helpful? Why not share this article?

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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Learn more about personal loans

What is a bad credit personal loan?

A bad credit personal loan is a personal loan designed for somebody with a bad credit history. This type of personal loan has higher interest rates than regular personal loans as well as higher fees.

Does refinancing a personal loan hurt your credit score?

Personal loan refinancing means taking out a new loan with more desirable terms in order to access a more competitive interest rate, longer loan term, better features, or even to consolidate debts.

In some situations, refinancing a personal loan can improve your credit score, while in others, it may have a negative impact. If you refinance multiple loans by consolidating these into one loan, it could improve your credit score as you’ll have only one outstanding debt liability. Your credit may also improve if you consistently pay the instalments on time.

However, applying to refinance with multiple lenders could negatively affect your credit if your applications are rejected. Also, if you delay or default the repayment, your credit score reduces.

What is a personal loan?

A personal loan sits somewhere between a home loan and a credit card loan. Unlike with a credit card, you need to sign a formal contract to access a personal loan. However, the process is easier and faster than taking out a mortgage.

Loan sizes typically range from several hundred dollars to tens of thousands of dollars, while loan terms usually run from one to five years. Personal loans are generally used to consolidate debts, pay emergency bills or fund one-off expenses like holidays.

Can you refinance a $5000 personal loan?

Much like home loans, many personal loans can be refinanced. This is where you replace your current personal loan with another personal loan, often from another lender and at a lower interest rate. Switching personal loans may let you enjoy more affordable repayments, or useful features and benefits.

If you have a $5000 personal loan as well as other debts, you may be able to use a debt consolidations personal loan to combine these debts into one, potentially saving you money and simplifying your repayments.

What is the average interest rate on personal loans for single parents?

Like other types of personal loans, the average interest rate for personal loans for single parents changes regularly, as lenders add, remove, and vary their loan offers. The interest rate you’ll receive may depend on a range of different factors, including your loan amount, loan term, security, income, and credit score.

Can I merge my personal loan with my home loan?

Yes, you can refinance your home loan and, in the process, merge or consolidate your personal loan and home loan. By doing so, you can lower the number of debts you have, and you may also reduce the total interest you have to pay.

However, you should consult a financial advisor or a mortgage broker to confirm that you are decreasing your total outstanding debt, including interest payments. The repayment term for a home loan can be much longer than that for a personal loan, and by merging the two, you could be repaying a higher amount over the full term.

Should I get a fixed or variable personal loan?

Fixed personal loans keep your interest rate the same for the full loan term, while interest rates on variable personal loans may be raised or lowered during your loan term.

A fixed rate personal loan keeps your repayments consistent, which can help keep your budgeting consistent. You won't have to worry about higher repayments if your rates were to rise. However, on a fixed loan you’ll also potentially miss out on more affordable repayments if variable rates were to fall.

Is a personal loan a variable or fixed-rate loan?

Depending on the personal loan lender, you may be able to choose between a fixed and a variable interest rate. But, there are a few distinct differences between the two, so it’s important to weigh up the pros and cons before deciding on what’s right for you.

A fixed interest rate loan gets you the convenience of knowing exactly how much you need to repay each fortnight or month. On the other hand, you generally won’t be able to make lump sum or advanced payments to close your personal loan early - or at least not without a penalty.

With a variable interest rate personal loan, you may be able to get a longer loan repayment term, with the option of paying off the loan early. You typically won’t need to pay any additional charges for an early full repayment either. The potential disadvantage with an interest rate that can change is that your repayment is not entirely predictable, as it can fluctuate with the market. However, you’ll likely have more options as more lenders offer a variable interest rate personal loan.

Can I get a no credit check personal loan?

Personal loans with no credit checks are available and called ‘payday loans’. These are sometimes used as short-term solutions for cash-strapped Australians. They often carry higher interest rates and fees than regular personal loans, and individuals risk putting themselves into a worsened cycle of debt.

How much can you borrow with a bad credit personal loan?

Borrowers who take out bad credit personal loans don’t just pay higher interest rates than on regular personal loans, they also get loaned less money. Each lender has its own policies and loan limits, but you’ll find it hard to get approved for a bad credit personal loan above $50,000.

How can I get a $3000 loan approved?

Responsible lenders don’t have guaranteed approval for personal loans and medium amount loans, as the lender will want to check that you can afford the loan repayments on your current income without ending up in financial hardship.

Having a good credit score can increase the likelihood of your personal loan application being approved. Bad credit borrowers who opt for a medium amount loan with no credit checks may need to prove they can afford the repayments on their current income. Centrelink payments may not count, so you should check with the lender prior to making an application.

Are there alternatives to $2000 loans?

If you need to borrow $2000 or less, alternatives to getting a personal loan or payday loan include using a credit card or the redraw facility of your home, car or personal loan.

Before you borrow $2000 on a credit card, remember that interest will continue being charged on what you owe until you clear your credit card balance. To minimise your interest, consider prioritising paying off your credit card.

Before you draw down $2000 in extra repayments from your home, car or personal loan using a redraw facility, note that fees and charges may apply, and drawing money from your loan may mean your loan will take longer to repay, costing you more in total interest.

Can I repay a $3000 personal loan early?

If you receive a financial windfall (e.g. tax refund, inheritance, bonus), using some of this money to make extra repayments onto your personal loan or medium amount loan could help reduce the total interest you’re charged on your loan, or help clear your debt ahead of schedule.

Check your loan’s terms and conditions before paying extra onto your loan, as some lenders charge fees for making extra repayments, or early exit fees for clearing your debt ahead of the agreed term.

What do I need to get a fast loan?

Most lenders will need to you provide the following information in your application for a fast loan:

  • Proof of identity
  • Proof of residence
  • Proof of income
  • Details of any assets you own (e.g. car, home etc.)
  • Details of any liabilities you owe (other personal loans, credit cards, mortgages etc.)
  • How much you want to borrow
  • Over how long you want to pay it back
  • Purpose of your loan