What Are Short Term Personal Loans And Do They Help In The Long Run?

If you need quick access to a small amount of money and are able to repay it relatively quickly, a short term personal loan may be an option to consider, although it’s important to be aware of their potential costs.

With a short term personal loan, sometimes referred to as a pay day loan or fast cash loan, you can typically borrow anywhere up to $2,000, according to ASIC’s MoneySmart website. MoneySmart advises that the deadline for paying back a short term personal loan is usually between 16 days and one year. These types of personal loans are intended to give you access to some extra money for a short period of time. Therefore, you may find their fees and charges differ from those for a regular personal loan and can often be higher.

Short term personal loans may be easier to obtain for people with a poor credit score than some alternative types of credit, such as a personal loan from a bank with a one-year term, because in many cases no credit history check, collateral or long term commitment is required. However, MoneySmart warns that lenders will still assess whether they think you can pay back the loan and may require you to give them up to 90 days of bank statements or other financial paperwork.

How do short term personal loans work?

Short term personal loans can typically be arranged quicker than a regular personal loan, with some lenders claiming that you could have the money in your account within an hour of applying for it. If not this promptly, then the majority of lenders say they can have the money approved and transferred to you within 24 – 48 hours, if your application is successful.

Short Term Personal Loans
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A major difference between short term loans and other types of personal loans is that not all short term lenders will necessarily require a credit check before approving your application. They often base their decision on your current income and financial situation, which could be helpful for those who may have defaulted at some point in their lives. A lender will agree a short repayment term, taking into account your current ability to pay, and this can be anywhere between 16 days and one year.

Who offers short term loans?

Short term personal loans are offered by many financial institutions, including small non-bank lenders, not-for-profit lenders and community lending associations. In addition, the introduction of peer-to-peer lending in Australia over recent years has provided another option to consider for those needing quick access to a small amount of money.

What can you use a short term personal loan for?

You could opt for a short term personal loan if faced with an unforeseen financial difficulty. Perhaps a faulty car part needs replacing or the washing machine has broken down. Maybe a higher-than-expected utility bill or medical emergency has upset the monthly budget. However, bear in mind MoneySmart’s advice that your lender may require you to make your repayments via direct debit from your bank account or a deduction from your pay, so it can be a good idea to ensure you have enough money in your account to cover these repayments and other living costs.

Short term personal loans for car repairs
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What about the interest rates and fees for a short term personal loan?

The fees and charges on short term personal loans are capped by the Australian Government. The exact fees will vary depending on how much you borrow, but according to ASIC, lenders are only allowed to charge you the following:

    • A one-off establishment fee of 20% (maximum) of the amount loaned
    • A monthly account keeping fee of 4% (maximum) of the amount loaned
    • A government fee or charge
    • Default fees or charges – the maximum amount a lender can charge you if you fail to make a repayment is twice (200%) the total amount of the loan. This includes any repayments you made under the contract plus default fees.
    • Enforcement expenses (if you fail to pay back the loan, these are the costs of the credit provider going to court to recover the money you owe them)

In addition, lenders are not allowed to charge you interest on the loan and they can’t charge direct debit fees on any short term personal loan entered into from February 2017. These caps on fees do not apply to loans offered by Authorised Deposit-taking Institutions (ADIs), such as banks, building societies or credit unions.

What are some pros and cons of a short term personal loan?

As mentioned, a short term personal loan can be quick and simple to arrange compared to a personal loan or credit card, and often doesn’t take into account your credit history. On the down side, short term personal loans can be more expensive than other types of personal loans or credit, so it is generally a good idea to check out all your alternatives first.

What alternatives are there to a short term personal loan?

If you have a good credit rating, then an unsecured personal loan could be a more cost-effective option as these usually have lower fees and charges, although interest is usually charged on these loans. Alternatively, a credit card could give you more flexible repayment terms, although it’s always a good idea to compare the interest rates offered and fees charged by different providers as these can vary. If you’re struggling with your water, phone or electricity bills, another tactic could be to call your utility provider and request a payment plan that you can more easily manage. If you earn less than $45,000 a year and hold a Centrelink healthcare or pension card, then another option you may want to consider is the No Interest Loan Scheme, which offers loans up to $1,500 and affordable repayments over 12 – 18 months to buy essential goods and services.

Katie Rodwell is a senior communications professional. She has worked both locally and internationally for almost 20 years with a particular interest in the personal finance, banking, professional services, government, not-for-profit and telecoms sectors. 

Katie Rodwell CanstarAbout Katie Rodwell

Katie brings over 20 years of writing experience and prepares a range of articles for the Canstar website. She began her career in London and has worked in senior communications and content development roles in Australia, throughout Asia, Europe and Latin America. She has studied media and languages with the London School of Public Relations, the National University of Mexico and taken further professional development courses with Curtin University in Western Australia.

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Image Source: Yuganov Konstantin (Shutterstock)

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