Short-term loans are a lending option for people who need a bit of cash in a hurry.
This form of lending is controversial due to its risks, but it remains an attractive solution for some people.
If you need cash quickly and are considering borrowing from a lender that only allows up to 6 weeks to repay, make sure you understand the potential drawbacks first.
There are other options that will likely leave you in a better financial position.
It’s a good idea to weigh all of the options available to you before deciding on one.
Keep reading to learn about what short-term loans are, why they can be problematic, and what to consider instead.
What is a short-term loan?
A short-term loan is when you borrow money for a relatively brief period of time, and often for a small amount (usually less than $1000).
Short-term loans are designed to be repaid within a few weeks, or when the borrower next gets paid.
If you actually pay back the loan within a few weeks, the amount of money you pay in interest is manageable.
However, a short-term loan can quickly become a monkey on your back because the longer you take to pay it off, the more interest you pay (more on interest rates later).
If money’s already tight, avoid short-term loans
If you’re looking for a short-term loan, then you may already be struggling to make ends meet.
The truth is, that a short-term loan could make your financial situation much worse if you don’t pay off the loan within a few weeks.
When you go beyond the initial loan period – usually a few weeks – the amount of interest you pay goes up significantly.
Then you’re stuck in a debt cycle where you can’t pay your bills because of the high cost of debts you have to service, forcing you even further into debt.
This is a terrible situation that no one wants to be in, but it’s a reality for many people who take out a short-term loan.
Before you go down this track, have a chat with the team at Loansmart.
Loansmart holds a Financial Advice Provider Licence issued by the Financial Markets Authority. We can quickly assess your financial situation and give you options that are in your best interest.
Learn more about why Loansmart is the smarter choice for people searching for short-term loans
Learn more about why Loansmart is the smarter choice for people searching for short-term loans below.
Getting the best advice
When you take out a loan, it’s important that you can trust your lender.
You want to make sure the loan you’re taking out is in your best interest, not simply lining the pockets of the lender or loan broker.
So, how do you know that they’re acting in your best interest?
Choose one who’s a member of the Financial Services Federation (FSF).
Loansmart is, and our membership demonstrates our commitment to responsible lending practices.
Our practices adhere to the strict guidelines set out in the FSF Code of Conduct, meaning we must keep our clients’ best interests at heart.
The lowdown on interest rates
To understand exactly why short-term loans can cause problems for borrowers, we have to talk about interest rates.
Interest is essentially a fee charged by a lender for borrowing their money. It’s charged as a percentage of the amount you borrow.
For example, a typical interest rate for someone with a good credit history might be 12.95% per year.
So, on a $500 loan, you’d pay just under $65 in interest if you paid it off over 12 months.
A typical short-term loan is 50% interest or more. These are considered “high-cost” loans.
With short-term loans, interest is usually charged by the day, because they’re designed to be for very brief loan periods.
The daily interest rate is usually 0.25% to 0.80%, which may not seem like much, but it quickly adds up the longer it takes for you to pay back the loan.
For example, on a $500 loan you’d pay almost $20 in interest over a four-week term – plus an establishment fee, which is typical of most lenders.
However, if you took 12 months to pay it back, you’re looking at about $250 in interest, not including the penalties the lender would be charging you because you’re late with your payments.
To summarise, short-term loans come with high-interest rates. That’s fine if you’re actually going to pay back the loan in a few weeks, but if it takes longer, you’ll be slammed with massive costs that make it very difficult to pay back the loan, leaving you in a terrible financial situation.
New rules limiting bad lending practices
There used to be many more short-term lenders in the New Zealand market than there are now.
This is because new laws targeting predatory lending practices were introduced in 2021.
The new rules cap the amount of interest and fees that can be charged on a loan at no more than 100%, and compound interest cannot be charged on high-cost loans.
As responsible lenders – and members of the Financial Services Federation – Loansmart supports this move that protects people under financial stress.
Being an FSF member means Loansmart helps you make decisions that are in your best financial interest.
Some lenders – including high-cost lenders – are motivated by how much profit they can make off your loan.
Loansmart supports our clients through difficult times by arranging smarter loans that work for them.
There is a need for emergency loans
While we believe short-term loans should be an absolute last resort, Loansmart provides emergency loans for people who need money urgently.
Sometimes things come up that you need cash for very quickly. If you find yourself in that situation, get in touch with the caring team at Loansmart.
Our tagline says it all: smarter loans >> faster.
We make it so easy! We jump through hoops so you don’t have to.
Simply complete our 3-minute online application form and we’ll get in touch to get some more info from you.
We’ll then put your loan application in front of 11 different lenders so you can choose the deal that’s best for you.
We work hard to get you a fair deal, offering smart solutions that meet your needs.
Why choose Loansmart
Loansmart is the smart choice when you need a fast solution. Even if you need a small amount of cash quickly, give us a go.
If you have bad credit, that’s not a dead end for us: we specialise in finding smart solutions for people in tricky financial situations.
Our loan amounts start at just $2,000 and our minimum payment term is 6 months. Most of our lending is unsecured, but sometimes we need to take our security over a car or other asset to get a loan approved.
Get a FREE loan assessment
It’s free to chat with us – get in touch today and we’ll give you a free loan assessment. With absolutely no cost or obligation, we’ll take a look at your financial situation and discuss some options with you.
It’s a great way to know where you stand so you can make an informed decision.
Short -Term Loans FAQ
In New Zealand, lenders must make sure you can pay back a loan before lending you money.
Responsible lenders will run a credit check as part of this process, as your credit history provides them with valuable information about how you manage debt.
Having a bad credit score doesn’t mean you can’t get a loan, and you can always improve your credit score if you make regular and timely repayments on loans.
With Loansmart, you don’t have to hide your credit score from us. We’ve helped thousands of borrowers get fast, fair, affordable loans despite their credit history. Learn about how Loansmart arranges bad credit and second chance loans for people with poor credit history.
There’s no such thing as a “1-hour loan” or an “instant loan”, because lenders need to do some checks before they lend you money.
However, it is possible to get a same-day loan with Loansmart.
Loansmart doesn’t keep you waiting. We offer loans on the same day – our tagline is Smarter Loans, Faster, and that’s exactly what we do.
Once you’ve completed our 3-minute application, we’ll get in touch to discuss your application before getting back to you with multiple options.
After you’ve picked the best deal, we’ll arrange for the money to go into your account.
The cash can be paid the same day if you fill out the online contract and any additional steps before the end of the day. You may get it the same day or the next morning, depending on your bank.
As a responsible loan broker, we make sure you can afford to pay back a loan before we arrange it.
We want to see people achieve financial success and freedom, not default on their loans and damage their credit scores.
We’re proud members of the Financial Services Federation, and as such we must put your best interests at heart when arranging loans on your behalf.
Learn more about Loansmart’s approach to responsible lending.
New Zealand consumer credit laws require lenders to run affordability checks before issuing people with loans.
At Loansmart, we ask you to provide your last 3 months’ bank statements when you apply for a loan through us.
We use this to evaluate your income and expenses to make sure you can pay back the loan.
