Short-term Loans

Everything you need to know before getting a short-term loan

A short-term loan in South Africa could offer you amounts of up to R40,000. This type of loan, as with all credit offerings, are subject to your credit profile, affordability, and eligibility.

The repayment term associated with short-term loans typically varies from 1 month up to 12 months. In some cases, lenders may offer longer loan terms. Interest rates are between 20% and a maximum of 27.5% per annum.

Why do you need a short-term loan?

When you find yourself in financial difficulty, the first thing you should do is to establish what you need the money for and how much you’ll need. Short-term loans are typically acquired for things like a vehicle breaking down unexpectedly or a medical emergency. Borrowing more than you need could result in greater financial difficulty in the long run.

What you need to apply for a short-term loan

Applying for a short-term loan in South Africa is getting easier and more convenient. With the age of technology nowadays you can apply for various types of financing online, from the comfort of your home or office.

You can complete an online application and submit any documents required without going anywhere.

Documents required to apply for a short-term loan

• Your South African ID/Smartcard
• Most recent proof of your current address
• The last three months stamped bank statements
• A payslip or employment contract
• A breakdown of your total monthly income and expenses

The general qualifying criteria for a short-term loan

To qualify for short-term financing, you need to reach a certain criterion. Responsible lending involves following the rules as stipulated by the National Credit Act and South African law. To qualify for a loan you need to:

• Be at least 18 years of age
• Be permanently employed
• Some lenders require a minimum income amount
• Subject to a credit check
• Undergo an affordability assessment
• Provide an address
• Have your salary paid into your bank account

The 5 main advantages of acquiring a short-term loan

There are various reasons why the acquisition of a short-term loan could be beneficial and a good solution during a difficult financial time.

• Record payouts – When the unexpected happens, short-term finance can be accessed quickly and there are no long waiting periods for payouts. The payout period is typically the same day that you apply or within 24 hours of the application being completed.
• No collateral needed – This loan option is unsecured and allows you to borrow money without putting up any form of security.
• Bad credit isn’t always a no – Having a good credit record ensures that you get better interest rates but having a poor credit rating does not mean you can’t acquire short-term finance. Many lenders cater for people with bad credit however, the interest rates are often high.
• The repayment term – A short-term loan is generally paid off between 1 and 12 months making it a short financial commitment that carries less interest over the loan term than other loan options available.
• Flexibility – Many lenders offer you tailored short-term financing. You can decide how long you want to repay and the desired loan term.

The 4 main disadvantages of taking out a short-term loan

Every credit offer available comes with its own set of pros and cons. It’s important to be well-educated on responsible lending. Short-term financing might sound appealing but could lead to many future financial difficulties.

• Higher interest rates – Good credit generally leads to lower interest rates however, short-term loans carry a much higher interest rate than other forms of financing.
• No missed payments – Skipping instalments on a short-term loan reflects negatively against your credit record. Because this loan carries a shorter repayment term, missing payments is not an option.
• Quick solution – Acquiring numerous short-term loans could not only land you in financial hardship but also reflect negatively on your credit record. This makes it more difficult to acquire credit in future.
• Penalties – Many lenders in South Africa penalise you for repaying your loan earlier. Ensure that you acquire a loan that’s within your means and won’t be a burden on your monthly finances.

How does a short-term loan affect your credit rating?

Obtaining a short-term loan reflects on your credit score. When you apply for a loan, the lender will do a credit check which causes your credit score to drop by a few points. Having or applying for multiple short-term loans will also have a negative impact.

When you have several credit facilities that exceed your credit-to-income ratio, this too reflects negatively against your name. Say for example your credit availability is R20,000 and you’ve used R15,000 thereof, your credit ratio is 75% and that causes a negative effect.

This often indicates impulsive and irresponsible borrowing and does not only affect your credit score negatively but also influences the interest rate you’re offered.

The top 4 factors to consider before you take out a short-term loan

1. The interest rate – Before you apply for this loan you should do some research and compare various loans against each other.
2. The loan term – Short-term loans are the preferred option because the loan term is short thus making the total interest payable less than with a long-term loan. Make sure you calculate the equated monthly instalment to establish the best loan for you.
3. The hidden charges – Not all lenders are transparent and upfront. Knowing what you’re paying for before you apply is beneficial when deciding on a lender.
4. Repayment – Calculating what you’ll repay monthly before you apply for the loan ensures that you don’t borrow more than your monthly budget allows.

What to consider when comparing short-term loans

Comparing loans helps you to find the best loan option available. With the many options available it could become difficult. To simplify the comparison process, there are some main factors to prioritise:

• The repayment term – The repayment term is based on your annual income. A longer repayment term means smaller instalments. Compare the different lenders to find the loan most suited to your budget.
• Your borrowing power – This is completely credit profile dependent. Compare the different lender requirements for a more favourable option.
• The processing time – Processing times on loans differ. If you’re in need of funds in a hurry, choose a lender with the shortest processing time. Short-term loans are typically processed within 48 hours.

What you can expect to pay for a short-term loan in South Africa

Because of the shorter repayment terms associated with these loans, the interest rates tend to be higher than that of other loans. However, the National Credit Act stipulates that the maximum interest rate that can be charged should not exceed the current repo rate plus 21%.

Initiation fees for the provision of the loan are also charged and this too is regulated. A maximum amount of R1,050 can be charged and generally starts at R165 plus 10% of the total loan amount starting from R1,000.

How are repayments made?

In South Africa, the general way of repaying a short-term loan is via EFT. When you apply for financing you’re required to supply the lender with your banking details. The agreed-upon monthly instalments are then deducted on the chosen date each month until your loan is paid off.

Are short-term loans considered expensive?

Compared to longer-term finance options such as a personal loan, any form of short-term finance is considered more expensive. Because the loan is repaid over a shorter period, the interest rate is higher than usual. Typically you can expect to pay the current repo rate plus 21% which includes all costs and fees.

South Africa's top 5 short-term lenders

With short-term finance gaining popularity over the past years, it’s good to know who the top 5 lenders are and what they can offer you.

• FASTA – They offer you quick and easy, hassle-free online loans in minutes. To apply for a loan with FASTA you’ll need to provide your ID number and the three latest payslips as proof of income. You could qualify for financing ranging from R500 up to R8,000 and enjoy a repayment period of between 30 and 90 days.
• Lime Loans – With their easy, safe, and reliable online lending platform you could access loans ranging from R300 up to R4,500 with a repayment period of between 5 and 55 days.
• Boodle – They offer you an easy-to-follow 5-step process that’ll take you no longer than 10 minutes to complete. You’re ranked on their SmileRank system for repayment habits and when you reach the top rank, you could qualify for loans ranging from R300 up to R8,000. The repayment periods are linked to the ranking system and range from 5 to 180 days.
• Finance27 – As one of the top lenders in South Africa, they promise same-day payouts and all you need to provide is your ID number. Their loans range between R500 and R6,000 and carry a repayment period of 61 to 65 days.
• Wonga – Wonga is a short-term lender that offers you flexible finance options. New customers could qualify for loans from R500 to R4,000 and repayment terms of up to three months. Existing customers can enjoy loan amounts from R500 up to R8,000 and repayment terms of up to six months.

The usual information like your ID number, proof of income, banking details, and cellphone number are required for the easy online application.

How a general application process for short-term finance works

Many lenders have gone above and beyond to simplify the application process. You can apply online and most applications take only a few minutes to complete. With a few minor differences in the process, you could generally expect:

1. Go online and navigate to the preferred lender's website.
2. Choose the desired loan amount and the repayment term that suit your needs and click next.
3. You’re required to complete an online application that usually takes only a few minutes. Provide the lender with all the information and documents required to prevent delays.
4. Your application is processed and your information is verified. The lender will ask for your consent to do a credit check.
5. As soon as verification is completed and the loan is approved, you’re presented with an offer that includes the total fees and costs involved and stipulates repayments.
6. If you agree to the terms, you can sign the contract and your loan is paid into your bank account within 24 to 48 hours.

How a short-term can affect your credit rating

Every application for credit that’s completed and submitted will reflect on your credit record. Submitting an application for credit usually drops your credit rating by a few points. Your credit score is a rating between 300 and 850.

A good credit rating ranges between 670 and 739. Credit will most likely be approved and you’ll enjoy a decent interest rate. A credit score of 740 and higher is considered very good. Your credit applications will be approved and you’ll enjoy lower-than-usual interest rates.

Tips for maintaining a healthy credit rating

There are many things you could do to ensure that you maintain a healthy credit rating. A good credit record makes obtaining credit easier and affords you better interest rates.

• The first thing you could do is to pay your instalments on outstanding credit on time.
• Only take out the credit you can afford. Exceeding your income-to-credit ratio will hurt your credit health.
• Rather consider a credit card instead of taking out numerous short-term loans.
• Check your credit score regularly to ensure that the information displayed is correct.

Can I get a loan with a bad credit record?

If you’re in need of a short-term loan but your credit record is not favourable, there’s no need to stress. Having bad credit does not necessarily mean you won’t qualify. There are many loan companies in South Africa that offer bad credit loans. These loans generally carry an increased interest amount.

How to know if a lender is legitimate

To find out if a lender is above board there’s a simple check you could do to verify the lender’s information. You can log on to the National Credit Regulator’s website and enter the lender’s name and registration number.

Continue by clicking on the search button. If the records on the NCR website match the information on the lender’s website, you can rest assured that they’re a registered credit provider.

Another method of verifying a lender is by searching the internet and looking for reviews from customers that used the lender’s services in the past. This is often a good indication of what you can expect from a company.