Whether it’s the cost of a car repair, a medical bill, or even last-minute travel, life has a habit of throwing unexpected expenses your way.
If your savings can’t cover them, or will leave you sailing too close to the wind, it will put you under a lot of financial pressure. That’s why many Australians turn to short-term loans as a quick solution to their cashflow issues.
However, while this might be an attractive option, you should make yourself aware of what you are signing up for. The risk of taking on a loan is that you could spiral into a debt cycle that may be difficult to get out of. That’s why it pays to do your due diligence.
Here are 5 things to check over before committing to a short-term loan. Hopefully, it will help you get the relief you need from your money worries without putting yourself in a worse financial position over the long term.
How Do Short-Term Loans Work?
A short-term loan is a type of borrowing designed to cover immediate expenses. As its name implies, it usually has a short repayment period. In Australia, this can include payday loans, fast cash loans, and small personal loans. All with terms that range from a few weeks to several months.
Many Aussies explore instant cash loan options when they need quick access to funds. These loans are often easy to apply for online and are attractive propositions because approval decisions are usually made quickly. Once they have been ratified, funds are typically deposited into your account within a short timeframe.
The great thing about these types of loans is that you can apply for many of them online. That said, they generally come with shorter repayment periods and higher loan interest rates. So, you must understand exactly how the loan works before signing up for one.
What To Consider When Taking Out a Short-Term Loan?
Whenever you take out a loan, it can affect your financial position and credit score. Here are five things you should bear in mind before doing so.
1. Understand the Total Cost of the Loan
One of the first things you should do is check the full cost of the loan, because it usually goes well beyond the advertised interest rate.
For instance, lenders may include establishment fees, monthly account fees, and late payment charges in your total loan package. These costs can add up quickly and can catch people by surprise.
It is worth evaluating the comparison rate, as it will provide you with a clearer picture of the total cost. Additionally, take the time to calculate the total amount you will repay by the end of the loan term. This helps you to determine the real impact of the loan on your finances and enables you to decide whether it is manageable.
2. Check the Repayment Terms
Repayment terms are arguably just as important as the loan amount. So it is a good idea to familiarise yourself with them.
Many short-term loans require weekly or fortnightly repayments. Depending on when you get paid from your employment, this can put pressure on your cash flow. Moreover, before committing, you should think about your current income and expenses. You’ll need to be honest when doing this and ask yourself questions such as can you comfortably meet the repayments without cutting into essentials like rent, groceries, or bills.
You should be aware that if you miss repayments, you may incur additional fees and black marks on your credit history. Therefore, you will have to assess whether drawing on a loan is the right thing for you to do. It is worth seeking legal advice to fully understand the implications of missed payments.
3. Compare Loan Providers
Something you should be aware of is that banks and lenders are businesses. There are also plenty of them around. Subsequently, you should invest the time and effort to compare providers to find the most suitable option.
The best lenders are the ones that are transparent about their fees and terms and conditions. While you’ll no doubt want to pay as little as you have to in interest, you should just pick the company that offers you the lowest rate. Instead, read their Google and TrustPilot reviews to see what other customers have to say about their experience with them. It’s worth noting that in Australia, banks and lenders must comply with regulations designed to protect borrowers. Hence, it’s in your best interests to always choose one that follows these standards.
4. Know the Risks of Short-Term Loans
All loans come with risks. While they can be helpful and even necessary in certain situations, you need to know what they are.
Short-term loans typically carry higher interest rates and, of course, need to be paid back over a shorter repayment period. This can make them a more expensive option than traditional personal loans. As mentioned, if you find yourself having difficulty making repayments, you can fall into a cycle of debt that is difficult to get out of.
That is why you should think carefully about whether a short-term loan is the right choice for your situation.
5. Review Your Alternatives
Before taking out a short-term loan, it is worth exploring what other options may be available to you.
For instance, you might be able to set up a payment plan with a service provider or ask for an extension on a bill. Alternatively, you might be able to turn to family or friends for short-term financial support, or benefit from financial assistance programs or hardship arrangements offered by various organisations.
Some of these solutions can help you avoid finding yourself in a higher level of debt. Even if you decide not to action them in the end, they are worth investigating at the very least.
