Short term loans come with many exciting benefits. They are generally easy to apply for and give you fast cash, which is convenient in an emergency. But before you rush to apply, consider these short term loan blunders that can cost you.
What are short term loans, and how do they work?
As the name suggests, a short-term loan is money you borrow for a short time, usually for a few weeks or a month. Generally, short term loans have to be repaid within a year. The most popular type of short term loan is the payday loan. A payday loan gives you cash that you pay back when you receive your next salary.
To get a payday loan, you have to be employed and show proof of income, such as recent payslips and bank statements. The good news is you don't need to offer security for the loan, and you can get approved even if your credit score is low. However, that means the lender's risk is higher, so it's typical for short term loans to also have higher interest rates.
The biggest advantage of short term loans is that they usually have fast and easy applications. You can also receive the money quickly, often within 24 hours of getting approved. But keep in mind that short term loans have lower borrowing limits with amounts ranging from as little as R100 to R4000 and sometimes up to R8000. That means short term loans are more suited for emergencies or situations where you only need to cover smaller expenses.
10 mistakes to watch out for when taking out a short term loan
Thinking of taking out a short term loan? The following mistakes should be avoided at all costs.
Failing to compare loans
As mentioned, short term loans are highly convenient. It's easy to take out the first loan you see because the lender offers instant loans. But there are so many short term loans on the market, and getting the best deal means shopping around first.
So, consider interest rates, fees, borrowing limits, repayment periods, and other factors when searching for the right option. It's worth it because getting the best offer can save you a lot of money. Be sure only to compare loans of the same type to make an accurate decision.
Choosing the wrong lender
South African lenders are not made equal. You must be cautious, particularly with payday loans because of unreputable lenders. These lenders have attractive offers that sometimes promise quick loans with no credit checks. However, their interest rates and fees will be excessively high.
In addition, they're not always transparent about what you're getting into. So do your research and only deal with trustworthy, responsible lenders registered with the NCR.
Borrowing more than you can afford
Responsible borrowing means being honest about what you can or can't afford. Many people get excited and borrow as much as possible, which is a big mistake. That's because taking out the loan and spending it will be exciting, but the repayment part will be stressful.
Even if you're offered more than you afford or need, you'll not be penalized for turning down the offer and choosing a smaller loan amount. Do your calculations beforehand, know what your budget can handle, and avoid taking out multiple loans in a short period of time.
Taking out the loan for the wrong reasons
This is a mistake you should avoid with any loan. Generally, it's best to only borrow for a worthwhile purpose. If you don't need the money or want to cover an unnecessary purchase, it's better to explore other less expensive options like borrowing from family and friends. Otherwise, it's not worth it to finance a holiday or a fun shopping trip if a high interest rate and fees are attached.
Not looking for hidden fees
Some lenders are not always forthcoming, so you must make sure there are no hidden fees that can mess up your budget in the future. Standard loan fees include an initiation fee and a monthly service fee, but sometimes additional fees also apply. The lender may charge application fees, early payment fees, or late fees. Find out how much it all costs and factor it into your budget to be prepared.
Not reading the fine print
Before you receive money in your account, you'll receive a loan contract for you to review and sign. The loan contract outlines all the essential details of the loan, such as repayment period, amount, interest rate, and fees. It may be tempting to rush this step so you can get the money. But if you don't read the terms and conditions of your loan thoroughly, you might get a nasty surprise down the line.
When reading the fine print, look at the Annual Percentage Rate (APR), which gives you an idea of the total cost of the loan. Also check the fees in case there are hidden fees not included in the APR. You should only sign the loan contract if you fully understand and agree with what it says.
Skipping payments or making late payments
We have all missed a deadline or two in our lives, but skipping your loan payments or being late on payments is not advisable. Most lenders will not hesitate to charge you late fees if you don't make the payment by a certain date.
These late fees can add up, and the missed payments can end up hurting your credit score. If you know you're unable to pay on time, you can always contact the lender to arrange an extension or a workable payment plan.
If you have trouble remembering your due dates, it's best to set reminders or opt for autopay. If you choose autopay, make sure there are sufficient funds on the due date to avoid further penalties.
Taking too long to pay it off
A short term loan is designed only for short term needs, hence the name. If you take too long to pay off the debt, it can quickly get expensive because of the high interest rates. Most people make the mistake of choosing a repayment period that's too long because they want a lower monthly payment.
However, the longer you take to clear the debt, the more interest and fees add up. So it's important to strike a balance to avoid this debt trap.
Using a short term loan for debt consolidation
Debt consolidation involves taking out a loan to repay other loans. If you're using a payday loan to do this, you could get in trouble because of the high interest rates. You may be unable to cover your monthly instalments because they will be higher.
In addition, short term loans only give you a small window to repay the loan. The shorter your repayment period, the larger your installment will be, and your budget might not be able to handle it. If you need to consolidate your debts, consider taking out a personal loan instead.
Not considering other options
When comparing loans, it's good to expand your options, do more research, and consider other types of loans. While payday loans offer many advantages, they are not the only available option. You can also choose a personal loan with a low interest rate and a more flexible repayment plan.
If you're not in a hurry to get the money, you can even check your credit report first to see if you can boost your credit score. For instance, fixing errors on your credit report can improve your score and allow you to qualify for better terms.
Should you avoid short term loans?
There are many mistakes to watch out for when taking out a short term loan. Does this mean you should not apply for this type of loan at all? In most instances, a short term loan is only suitable if you have an emergency. This applies if the loan comes with high interest rates and fees that can cost you. If you don't have an urgent financial need, it's better to consider other options, such as borrowing from family and friends. Another option is a small personal loan with a lower interest rate.
But if taking out a short term loan is necessary, make sure you only borrow what you can afford so you can pay back the money quickly.
Find more alternatives with MyLoan
One of the biggest mistakes to avoid with short term loans is borrowing without comparing options first. There are so many options on the market, and shopping around can potentially save you money. You're also more likely to get a loan with better terms and conditions.
However, more often than not, people who take out short term loans need money in a hurry. So there might not be enough time to browse different sites looking for the right loan. In that case, using a loan comparison website like MyLoan can help.
All you need to do is fill in a single application form. Once you submit it, it's forwarded to multiple lenders, who will review your application and then get in touch with an offer if you qualify. After comparing the offers, you choose the best loan for you and proceed with the application to receive money.
To summarize, short term loans can be beneficial if you know which mistakes to avoid. More importantly, do your homework and compare offers before you apply for this type of loan.