Short-term loans are one of the most popular types of credit products in New Zealand. They include quick cash loans and payday loans and can be used for any short term cash need from buying groceries to taking a small vacation.
There are many instances in our lives when we find ourselves in a desperate financial situation with empty pockets and little or options to help us remedy the situation. In such emergency situations, the best way out would be to get a short term loan.
Quick & Easy Money
You can repay what you owe as soon as you get income. However, this option is not always the most suitable. It should not be considered as a way out every time you run out of money or cannot pay your bills. There are some risks attached to short term loans.
Using such a credit product may actually put more burden on your finances instead or providing some kind of relief. Before you apply for a short term loan, it is strongly recommended that you make yourself familiar with the basics.
That way, you will be able to make the correct decision based on your personal situation.
What are short-term loans?
Short term loans are basically micro loans, which are normally provided to individuals who need temporary cash help for paying their bills. The loans are only for short term use.
No more than a few hundred dollars can be borrowed at one time. You will be expected to make the repayment after a few weeks. Some lenders may require you to leave a written check when you take out the money. The lender will cash the check once you have sufficient funds available to make the repayment.
In case you fail to repay the loan, you will have the option for rolling it over. Basically, the term of the loan will be extended so you will have more time for repaying it. But at the same time, the fee amount gets higher with the passage of time and the loan becomes even more expensive.
The short term loans are marketed as loans with no credit check.
The easy access comes at a price, however.
When compared to other types of loans available in the market, the short term loans are found to be among the most expensive.
The annual percentage rate can be quite high. It can even reach several hundred percent in certain cases. For example, for borrowing NZ$100, you may expect to pay NZ$20 in the form of charges to the lender within 2 weeks. This means that you will be paying an annual percentage rate of 426% on your short term loan.
There are many examples of debtors ending up paying more than 1000% annual percentage rate on their loans.
The most obvious and biggest demerit of these types of loans is that the cost of borrowing is quite high.
At the end of the day, your financial situation may actually worsen instead of showing any signs of improvement especially if you lag behind with your payments. These loans are never a good option for individuals who do not have a steady source of income as they can reduce the amount of money available for spending even further. You may utilize this option once or twice when you need a loan on an urgent basis. However, it should never be incorporated in a long term financial strategy. The rate of interest is often very high.
That is why the short term loans might be considered feasible for dealing with financial emergencies, but you should not rely on them for long term use.
Moreover, in case you do not have a steady source of income, there is always the chance that the checks you signed may bounce. This would not only ruin your credit score, but your bank would impose further overdraft chances. In the long run, the bank may refuse to provide any kind of cooperation. There have been many instances when debtors were sued by lenders because of defaulting on a loan.
The longer you stretch the time period for repayment, the more interest and fees you will be paying.
Over the past few years, more and more banks and other traditional financial institutions have been taking greater interest in the short term loan market. This is mainly because of the high level of profit that lenders are making in this niche. The traditional bank loans are always considered to be the most preferable option due to the lower cost of borrowing. At the same time, the short term loans provided by banks are not in any way different from other kinds of short term loans even though the names and terms and conditions may vary.
Moreover, under certain circumstances, the short term loans provided by banks may actually be a far worse option. This is because the bank has access to your bank accounts and may pull out the funds as soon as they come in.
They may also ask you to use security.
In other words, you may suffer another financial setback and lose all control over your income and assets.
Risks associated with Short-term loans
Short term loans have a high degree of risk for obvious reasons specially if you are taking them from a bank.
While this option is always available, you should keep in mind that there are some alternatives which you can use as well. You should ensure that you always have an emergency cash fund in place. Still, this may be very difficult to achieve for those who are already in a dire situation.
Secondly, your credit score should be such that you will not face any trouble borrowing money from lenders.
Thirdly, it is always a good idea to have a credit card at hand.
Fourthly, an unsecured cash loan can always be availed from a bank or credit union. Lastly, you may consider renegotiating the repayment plans on your existing loans with the lenders to get more disposable income during the month. This is always suggested by financial experts.
Short term loans do have their share of advantages.
If you make your payments on time, you will avoid all those extra charges and interest payments and keep your spending under control. Moreover, these loans are easy to get and provide quick relief from an impeding financial emergency.