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

What is a short-term loan? 

If you need to borrow money but know you can repay the funds in weeks or months, not years, you might be on the hunt for a short-term personal loan. While ultra-short-term loans are often associated with high-risk payday loans, there may be other options available. 

For instance, you might consider a personal loan with no early repayment fees. This could give you the freedom to repay a debt over a loan term of your choosing—not limiting you to the term on the box (which generally starts at one year). 

Some smaller lenders also advertise personal loans with loan terms of less than one year, though they’re less common. 

What are your options for short-term loans? 

If you need to borrow money to cover an expense and are confident you can pay it back within a year or less, your options include:

• Standard personal loans: If you have a good credit rating, then a secured or unsecured personal loan could be a more cost-effective option. While interest is charged on these loans, they normally have fewer fees and charges than payday loans. 
• 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.
• Buy Now, Pay Later (BNPL): If you need to borrow money to make a purchase and know you can afford to repay the funds quickly, a BNPL service could help you break the cost down into more affordable bites. Beware, missing a payment can trigger steep late fees and potentially impact your credit score.
• Salary or payment advance: Your employer or Centrelink may pay a portion of your upcoming wage or income support early. Because this is an advance on money you’re already entitled to, it’s generally interest- and fee-free. However, because repayments are automatically deducted from future pay cycles, you should budget carefully so you don’t find yourself short on your next payday.

Consider the following case study of how it could look to take out a personal loan to move house. 

Case study: Jocelyn is moving from Sydney to Melbourne 

Jocelyn lives in Sydney and is planning to relocate for a new job in Melbourne. To cover moving expenses and her new rental bond, and to cover any other expenses through the move, she decides to take out a personal loan for $5,000. 

Jocelyn successfully applies for a personal loan with an interest rate of 9.5%. She wants to avoid as much interest as possible, so she decides on a term of one year to repay the loan. 

Here’s how her repayments would look monthly, fortnightly or weekly:  

If she wanted to repay the personal loan before the year is out, she might face an early repayment fee, but this isn’t always the case. 

What to consider when looking for a short-term personal loan

• Interest rate: Choosing a fixed or variable rate can affect your costs. A fixed rate means your repayments will stay the same across the term, whereas a variable rate can go up and down, making your repayments fluctuate accordingly. 
• Fees and charges: Read the fine print before signing up, as some loans have establishment and even early repayment fees. 
• The comparison rate: Lenders are required to display a comparison rate alongside the interest rate of credit products; it is the interest rate plus fees and charges, as a single percentage, to give you a truer picture of the cost of the loan. 
• Any additional features: Some loans offer features like the ability to make extra repayments at no cost, if this is important to you.   
• Late payment fees: This is something to be particularly aware of when it comes to BNPL and payday loans, which can have very high fees for late or missed payments. 

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. 

How do payday loans work?

A payday loan, sometimes called a short-term loan, is a loan for a small amount of cash, typically for amounts of up to $2,000, with loan terms generally 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. 

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 payday 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. 

Are short-term payday 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: A 2025 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 do if you’re in financial hardship?

If you are struggling with bills or need to borrow money but don’t qualify for a standard personal loan, you still have options. You can: 

• Contact your provider: If you’re struggling with your water, phone, or electricity bills, you could call your provider and request a payment plan.
• Try the No Interest Loans (NILs) scheme: 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. 
• Seek financial counselling: 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.