Short-term loans can fill a gap between now and payday, especially if you have an instant need for cash, but are they safe?
Loans like mortgages and credit for cars are usually with you for a long time, but what if you need a short-term option? Borrowers take out these loans with the intention of paying them back quickly. They’re becoming an increasingly popular option for Kiwis looking to borrow money and deal with the debt in a timely fashion.
⚠️ Warning: be cautious with short-term loans
If you're experiencing financial hardship and would like to speak to someone for free financial counselling, you can call the MoneyTalks helpline operated by FinCap on 0800 345 123. It is open from 8:00am to 5pm, Monday to Friday and 10am to 2pm Saturday. When comparing short term loans, ensure you take into consideration any fees, charges and rates you may be charged.
Alternatives to short-term loans
Consider these alternatives before applying for a payday loan:
Use online Government resources. The Commerce Commission New Zealand website explains how loans works and what to be aware of when borrowing from a lender.
Payment plans. Talk to your electricity, gas, phone or water provider to see if you can work out a payment plan or receive an extension on your due date if you’re behind on payments.
Contact your creditors. Speak with creditors about extending the due date of your payment, or working out a new payment plan that works for both of you.
Seek personal loans elsewhere. Consider a small personal loan from a bank or a credit union. You may qualify for a loan with much lower interest rates than those offered by payday loan companies.
Pay with credit card. Consider paying with your credit card to cover your emergency bills or payments. This is not a long term solution, as you’ll need to pay off the balance as soon as possible, but it’s an alternative to a short term loan with high – and immediate – interest rates.
Short-term loan comparison
Types of short-term loans in New Zealand
People use short term loans for a variety of purposes and as such, there are a few different types you can consider.
Payday loan
People use payday loans as a short-term solution, so they can repay it using their next paycheque. The lender usually bases the loan amount, (which can be as high as $2,000 or as low as $100), on your income and current financial situation, so it can be an option for people with less than perfect credit.
Unsecured short-term loan
An unsecured loan is one which does not require you to use a asset, such as a car or house as collateral. Therefore, the eligibility requirements are far stricter because the lender is taking on more significant risk and will receive nothing if you default on your loan. Unsecured loans usually offer a minimum term of one year.
Secured short-term loan
Secured short-term loans involve you securing an asset, for example, a car or your house, which means the bank can repossess it if you default on the loan. These loans pose minimum risk to the lender but are extremely risky for you as the borrower, as you may lose the asset you put up as security.
Make sure you weigh up the benefits and drawbacks?
Short-loan terms. Quickly repaying the debt is one of the most significant benefits of a short-term loan, meaning less interest and fees.
Various loan amounts. You can typically borrow between $100 and $2,000 but it may be as much as $10,000.
High cost. Short-term loans, from standalone lenders, come with higher rates and fees than banks and credit unions.
Dodgy lenders. While many reputable lenders operate in this space, you may come across dodgy ones that approve you for a loan you cannot afford.
Reasons you might need a short-term loan
People choose to get short-term loans for a variety of reasons, including;
To pay for unexpected or forgotten bills or payments Sometimes bills can pile up, and it’s not until the reminder letter comes from the utility company that you remember you haven’t paid. If the bill is exceptionally overdue, it could disrupt your service supply. If you speak to your provider, but it won’t approve an extension, a short-term loan may help solve the issue.
To cover expenses until payday If you receive your pay fortnightly or even monthly, you may find you are short on funds for one of two days or even a week. If you can’t make your funds last until payday, you could apply for a short-term loan. Bear in mind that these loans come with a higher than standard repayment costs.
To bridge an income gap, when you are waiting for a payment If your employer is sometimes unreliable with your pay, or a payment is taking longer to clear than expected, then you may wish to use a short-term loan to pay for a necessity before your money hits your account.
To pay for shopping or a holiday Sometimes you need to get away from the hustle and bustle, but don’t have the money to make it happen. If you want to take a holiday but don’t want the hassle of saving, a short-term loan could make your vacation arrive sooner.
To pay for an item when you don’t want to or cannot use a credit card It’s no secret that retailers love cash and you can often pick up items at a significant discount if you choose to pay with cash over plastic. You can also use cash at garage sales and op shops to snap up a bargain.
Case study: Sarah and her mechanic
Sarah finds herself in a difficult situation. It’s one week before Christmas, and her car breaks down on the way to the shops in Napier. She doesn’t use her car often, mainly to get places on the weekend, so usually, it wouldn’t be an issue. The trouble is, Sarah needs her car to visit her family in Auckland on Christmas day, so she can’t wait to repair the car the following week when she receives her pay.
The car repairs will cost $450, her credit card is maxed out, and she needs to pay the mechanic tomorrow. Sarah considers her options and finds that a short-term loan will best meet her needs. She will receive her pay at the end of the month, so can repay the loan without difficulty.
Should you apply for a short-term loan?
When deciding whether to apply for a short-term loan, you need to consider your overall financial position. Are you borrowing money to pay off other debt? If you are, it is a risky practice and has the potential to lead you into a dangerous spiral of debt.
Think about whether you are using this loan to pay for long-term recurring expenses, such as everyday living because this is a dicey practice and one that will see you add to your debt. You need to consider your current debt and your ability to pay back a short-term loan.
Questions you might have had about short-term loans
There’s no shortage of misinformation about the range of short-term loans in New Zealand. If you have a question, please feel free to leave a comment below.
Short-term loans can last anywhere from 2 days up to a year. It is essential to work out a budget and base your repayment schedule on your pay cycle.
There are unsecured bad credit lenders in New Zealand, but did you know you can increase your chances of receiving approval if you use a valuable asset as security against your loan. If you can’t make the repayments, you give the lender authority to take the collateral as payment for the outstanding loan amount.
There are a range of pros and cons to using your credit card or an overdraft as a short-term solution for a quick cash advance. It’s vital to understand the difference in interest charges and repayment options for credit cards.
With an overdraft, your account goes into arrears and the bank charge you interest on this amount. By using a short-term loan, you know what your repayments are and when you need to pay them.
There are car loan leases in the market that require a deposit for you to secure the finance. Sometimes borrowers use a small loan to obtain a deposit for the car finance and then refund it through the finance amount. It is wise to consult a financial planner before considering these options.
When you apply for a loan, you need to show the lender that you receive pay regularly and can service the loan repayments. In the past, you did this by printing off your bank statements and faxing them. As there has been a progression in technology, there is software that allows you to log in and provide your statements to the lender electronically. These systems are 100% secure and take place over 128-bit encryption.
In a perfect world, suppliers pay their invoices on or well before the due date. However, this often doesn’t happen and your time is spent chasing missing payments. If you can’t wait for clients to pay, there could be another option. If your invoice cycle is 60, 90 or 120 days, a short-term loan may help you manage your cash flow, until customers pay their invoices.
Matt Corke is Finder's head of publishing for rest of world and New Zealand. He previously worked as the publisher for credit cards, home loans, personal loans and credit scores. Matt built his first website in 1999 and has been building computers since he was in his early teens. In that time, he has survived the dot-com crash and countless Google algorithm updates.
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Sarah finds herself in a difficult situation. It’s one week before Christmas, and her car breaks down on the way to the shops in Napier. She doesn’t use her car often, mainly to get places on the weekend, so usually, it wouldn’t be an issue. The trouble is, Sarah needs her car to visit her family in Auckland on Christmas day, so she can’t wait to repair the car the following week when she receives her pay.