Short-term loans: what are they and how do they work?

What is a short-term loan? 

A short-term loan, sometimes known as a payday loan, is a loan for a small amount of cash. Short-term loans are typically for amounts of up to $2,000 and have loan terms ranging from 16 days to a year.

These kinds of loans may be advertised as a quick financial fix if you need money fast, but experts warn they should be approached with caution. This is due to the very high fees and charges attached, and because many lenders don’t perform full credit checks on applicants.   

If you’re looking for a traditional personal loan, the shortest loan term most lenders offer is one year. 

How do short-term personal loans work?

Short-term or payday loans differ from standard personal loans in a number of key ways:

Faster approval: Some lenders claim borrowers turning to short-term loans can have their money within an hour of applying, while others say they can approve applications and transfer funds within 24 to 48 hours. 

Shorter repayment terms: The standard length of a short-term loan is 16 to 265 days. This is shorter than terms on standard personal loans, which typically start at one year. 

No credit checks: Some short-term lenders won’t perform a full credit check,  instead basing their assessment of you on your current income and bank statements. 

Higher fees and charges: Short-term and payday lenders can’t legally charge interest on loans. They make up for this by charging very high fees, meaning you can end up paying back a lot more than you bargained for. 

How expensive are short-term loans? 

According to Moneysmart, standard payday lenders can charge an establishment fee of 20% of the amount borrowed, then a monthly fee of 4% of the loan amount.

Say you were to borrow $2,000 with  these terms and repay it over a year: 

• Establishment fee: $400 (20%)
• Monthly fee: $80 (4%)
• Total monthly fees: $960 (over 12 months)
• Total fees: $1,360   

This means that a $2,000 loan from a payday lender could actually see you repaying $3,360 over 12 months. 

Who offers short-term personal loans?

Short-term personal loans are offered by a range of institutions in Australia, including small non-bank lenders.

Are short-term loans risky?

The National Debt Helpline highlights several risks associated with short-term loans, like:

• Direct debit trap: Payday lenders usually set up direct debits that coincide with the day you get paid. This can mean funds are taken from your account before you can allocate them to rent, food, bills, and other essentials. 
• Potential for a debt spiral: If you can’t afford high fees and repayments, you may need to take out another loan to cover them, resulting in a debt spiral. Worryingly, the Consumer Action Law Centre says that this happens to around 15% of payday loan borrowers.
• High cost of fees: While you may only need to borrow a small amount of money with a payday loan, fees and charges can add up quickly, often making them much more expensive than standard personal loans. 
• Concerns over predatory lending: A2025 ASIC review raised concerns that some short-term and payday lenders may encourage vulnerable borrowers into unsuitable repayment contracts. 
• Credit score impacts: While short-term and payday lenders don’t always perform credit checks, failure to repay a debt can negatively impact your credit score, potentially making it harder to borrow money in future.
• Potential for aggressive tactics: If you’re unable to repay a short-term loan, your lender may take aggressive strategies to recover its funds, including sending debt collectors to your home. 

What can you use a short-term personal loan for?

Some people may opt for a short-term personal loan if faced with unexpected costs, like urgent car repairs, medical emergencies, higher-than-expected utility bills, or the cost of replacing a broken appliance like a fridge. MoneySmart says that, if you need money in a situation like this, there are other options for financial support or relief on your bills. 

Alternatives to short-term loans

Depending on your financial position, you may have a number of alternatives to a short-term lending:

• Standard personal loans: If you have a good credit rating, then an unsecured personal loan could be a more cost-effective option. While interest is usually charged on these loans, they normally have fewer fees and charges. 
• Credit cards: While these carry risks, using a credit card for a necessary expense could give you more flexible repayment terms. That said, if you’re considering a credit card, it’s important to compare the interest rates and fees charged by different providers.
• Contacting your provider: If you’re struggling with your water, phone, or electricity bills, you could call your provider and request a payment plan.
• No Interest Loans (NILs): If you have a health care or pension card, or earn less than $70,000 annually as a single person or $100,000 with a partner or dependants, or have experienced domestic violence in the last decade, you may be eligible for the NILs scheme. The scheme offers loans of up to $2,000 for essential goods, or $3,000 for rental bonds and disaster relief. Further eligibility criteria apply. These loans can be repaid over 12 to 18 months, without any fees or charges. 

What can you do if you’re struggling with debt?

If debt is getting on top of you, there are free services that can help you with advice. You can contact the National Debt Helpline (NDH) on 1800 007 007. The NDH helps consumers find individual counsellors and organisations in their area. It can also provide information and resources on what your rights are if you are experiencing financial hardship.