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Short Term Loans in South Africa

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What are short term loans?

Short term loans are a quick way to get cash for an emergency. You can use the borrowed funds to solve business cash flow problems or for other personal matters. As the name suggests, this type of loan applies for only short periods.

Different registered credit providers in South Africa may consider a short period to be between 1-2 years. Generally, most short term loans have to be repaid within a year. They can be processed in as little as 24 hours. Also, even if your credit history is not excellent, you can still qualify for a short term loan.

A short-term loan is, therefore, an excellent solution for both individuals and businesses looking to fix a temporary financial difficulty.

Common features of a short term loan

  • The loan must be paid off quickly, usually within six months or one year.
  • They typically range from R500 – R250 000.
  • You can receive a lump sum in as little as 24 hours after application.
  • They involve slightly higher rates compared to long term loans.
  • However, they can be cheaper to repay than long term loans .

Steps to receiving a short term loan

  1. Determine the amount you wish to borrow and which you can afford to pay back.
  2. Compare short-term loan options and choose a suitable lender.
  3. You should agree with your lender on the following things:
    • the interest rate;
    • the full amount you have to pay back;
    • the period you are expected to pay back the amount; and
    • the dates on which the instalments will be paid.
  4. Once you submit your application, you give the lender time to process it. During this time, they may also look at your cash flow history and other financial activities.
  5. If you qualify for the loan, the money is quickly forwarded into your bank account.
  6. You use the funds to cover your immediate financial needs. At the same time, you start paying off the short term loan as agreed until the loan is paid back in full.

What kind of short term loan should you choose?

Short term loans are usually on offer in the following forms:

  • Payday loans

Payday loans are common in South Africa. They are easy to obtain from many reputable banks and lenders. Payday loans are usually taken to cover an emergency while you wait for your payday to arrive.

When your salary reflects in your bank account, the lender is authorized to take the amount you borrowed plus interest. Payday loans have very high interest rates, and they typically have to be paid back in one instalment.

  • Merchant cash advances

A merchant cash advance offers an excellent option for businesses facing cash flow and working capital problems. The process is simple and straightforward: A business receives a loan from a lender. The lender, in turn, gains access to the business’ card terminal.

Each time the business gets money from customers through card payments, the lender subtracts a small instalment until the loan is paid in full.

  • Short term online loans

An online loan can be accessed by simply visiting an accredited lender’s website and filling out an application form. In any case, the application and processing are all made online.

Once the loan is approved, the money is then instantly transferred into your bank account. Repayment usually involves the lender automatically taking the instalments from your account.

  • Invoice Financing

This type of loan is meant to support businesses while they wait for customers to pay their invoices. Businesses can, therefore, borrow money against their unpaid invoices (accounts receivables). The loan amount is typically a percentage of the total invoice amount.

When the customer finally pays the invoice, the lender then takes the amount owed by the business, including interest and other service fees.

  • Lines of credit

Lines of credit can be viewed as credit cards for businesses. The business can use funds from the line of credit. How much depends on the limit placed on the line of credit.

The business then has to pay back the amount they have used plus interest at a later date. The number of monthly repayments also depends on the money borrowed by the business using the line of credit.

Benefits of short term loans

  • You pay less on interest – This is because you typically have to pay off the loan within a year. Compared to long term loans, this results in lower interest payments.
  • You can access the loan quickly – Since the loan has to be paid back within a short time, most lenders are willing to process short term loans for you quickly. Once your application is successful, the money is transferred into your bank account (sometimes within minutes).
  • There are no strict requirements – Your credit score doesn’t have to be perfect for you to receive a short term loan. Most businesses and individuals easily qualify for a short term loan. This is because the loan is usually a smaller amount compared to longer-term arrangements.

Disadvantages of short term loans

  • Penalty fees can be costly – If you don’t repay the loan as agreed the penalty fee and interest rates can make the short term loan very costly.
  • Dealing with untrustworthy lenders will cost you – While short-term loans are relatively easy to access some lenders can exploit you by charging unreasonable fees and interest rates.
  • You can only borrow small amounts – Because the lender requires you to pay back the amount in a short period, they will only usually give you a smaller loan amount.

What do you need when applying for a short term loan?

Your chosen lender may need to see the following before considering your application:

  • Bank statement showing account activity for the last three months;
  • Proof of identity that also shows you’re 18 years old and above;
  • Proof of regular income.

Bottom line

Short term loans should only be taken if you can afford to pay the required monthly instalments. Otherwise, defaulting on your short term loan can damage your credit score and get you into more debt.

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