ICE: Short term loans to the rescue!?

When confronted with an unforeseen emergency, money is usually involved and you need it very quickly, if not immediately. An emergency fund, carefully built up over time, is still the best solution when you need money In Case of Emergency (ICE), but the best laid plans of mice and men go awry and when you find yourself in the unenviable position of needing cash immediately, short term loans can provide a solution.

However, short term loans are a different kettle of (financial) fish and should be approached with caution, courage and only after carefully studying (not just reading) the Terms & Conditions.

Short term loans are offered by banks as well as other institutions that specialise in cash loans, often called micro lenders. The word ‘micro’ refers to the core of these lenders’ business, which consists of making small amounts of cash available to you immediately; an amount just enough to cover the ‘cost’ of your unforeseen emergency.

Whatever the financial decision that you have to make, always discuss your financial needs – including the emergency that you need a short term loan for – with a professional and independent financial advisor or planner. They are well versed in all financial products and services and will be able to advise you on the upside and downside of short term loans and other options. Doing some research upfront will enable you to discuss available options from an informed point of view.

What can the banks do for you?

Some financial institutions, notably banks, offer what they call a temporary loan, which is also a small amount of money made available to you credited to your active bank account (held at the same bank) immediately. No application form is required, but credit approval applies and your credit profile and record will be checked to determine whether you qualify for a loan, and thereafter to determine the amount you qualify for. This could take some time.

Generally, if you have a good credit record or profile, you are more likely to engage with your bank when you need money for an unforeseen expense. However, when friends are few and credit cards or other usual financial channels cannot come to your aid because your credit record or profile has been tarnished and you have possibly already been blacklisted, micro lenders can generally come to the rescue. You will only qualify for a short term loan if you have a steady income (earning a monthly salary from an employer) and an active transactional or savings account. The banks also point out that they will not grant you any credit, including a short term loan, if you are self-employed and not earning a steady income, but determine your own salary.

Run this past your Financial Advisor

So, you have discussed it with your financial advisor, you are 18 years or older, earn a steady income and you are ready to take the plunge and take out a short term loan. Not so fast, as you may risk losing all and compound your already tarnished credit record or profile if that is your reason for seeking a short term loan. In most countries, there is legislation governing financial services, as when people are out of pocket they make emotional rather than rational decisions, making them easy prey to irresponsible lenders. If some accreditation applies in your country, use this as the first criteria when choosing a micro lender. Being accredited means that their license can be revoked when they act irresponsibly and abuse clients’ vulnerable position to ‘bully’ them into signing unfavourable loan agreements.

Usually, you can easily and confidentially apply for a short term loan by completing a simple online application form, a definite upside if you don’t want anybody to know that you are experiencing financial difficulties. Another upside is that you don’t have to complete dozens of forms or answer questions on why you need money. Yet another upside is that once you have applied, an answer is just minutes away and once you have been notified that you qualify, the money is paid into your active bank account immediately. When you take out a short term loan for the first time, a (small) maximum loan amount applies. Once you have built up a good track record, you could be eligible for a bigger loan. . Another kind of short term loan is called ‘payday loans’, taking the form of a credit advance on your salary when payday is too far off and you need money now.

Now let’s consider the downside of short term loans

A serious downside is the interest rates, which can be exorbitant. In the case of the temporary loan taken out from a bank, the interest rate usually only kicks in if you don’t pay off the entire loan within a certain period of time, and it is fairly low. A downside of these loans is that all deposits made into the transactional account as soon as a day after signing the loan agreement, is allocated towards payment of the loan. In some instances, especially with short term loans offered by banks, an initiation fee and Credit Life Insurance apply (added to your monthly repayment amount). There is good measure for telling consumers to carefully study the T’s and C’s and fine print of these loan agreements, as it can be punitive and so open-ended that you can easily find yourself in hot water, your loan agreement cancelled if, for example, you do, or allow anything to be done, that may prejudice the lender’s rights or interests.

Is a short term loan worth the risk?

You decide, but only after discussing it in detail with your financial advisor, as well as studying the T’s and C’s and interest rates.

Remember, the devil is in the detail!