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Everything you need to know about short-term loans

Are you considering a short-term loan but you’re not sure whether it’s right for you? We give you the guidance you need to make an informed decision.

27 June 2023Helen Tippell 6 min read
South African money

Ready to get a loan?

ClearScore connects you with short-term loan offers that you’re likely to qualify for.

See my loan offers

Financial emergencies arrive unannounced, and you may suddenly find yourself in a situation where you need to borrow a small amount of money to tide you over. In these situations, regular loans may not be ideal given their higher sanction amounts and longer repayment periods.

This is where short-term loans can be useful. Read on to learn more about the potential costs and benefits of borrowing such loans:

A short-term loan is an unsecured loan that can be repaid over a short period of time, usually between one to twelve months. Typically, you can borrow between R1,000 and R15,000.

Short-term loans are considered “unsecured” because they’re not tied to an asset. This means that they’re considered higher risk and, therefore, lenders usually charge a higher interest rate for them.

This is in contrast to “secured” loans, such as vehicle finance that’s tied to your car. If you default on your repayments, the lender has peace of mind that they can repossess your car to help recuperate their losses. However, the same cannot be said for short-term loans.

The upside of a short-term loan is that you can use it for anything you choose, such as funding a small business, meeting cash emergencies, and paying hospital bills. You don’t have to explain to your lender why you need the loan or what you will use it for.

A range of financial institutions, including non-banking companies, can be short-term loan lenders in South Africa. Short-term loans will require a credit check since the lenders always consider a borrower's repayment record and financial situation when evaluating the loan application.

A range of financial institutions, including non-banking companies, can be short-term loan lenders in South Africa. Short-term loans will require a credit check since the lenders always consider a borrower's repayment record and financial situation when evaluating the loan application.

Make sure your credit score is on track so that you can qualify for a short-term loan when you need it. If your score is low, you can sign up for our free coaching plans that will guide you towards a better score.

Short-term loans tend to be more expensive compared to long-term loans because they have shorter repayment terms. When it comes to interest rates, South African lenders are not legally permitted to charge more than 21% plus the current repo rate.

They can also charge initiation fees for providing the loan. As per the National Credit Act, lenders are permitted to charge a maximum of R1,050, which starts at R165 plus 10% of the loan amount that’s in excess of R1,000.

Here are some risks of taking out short-term loans:

  • Inflexibility in loan terms: Typically, short-term loan repayment terms are rigorous with little or no room for negotiation. Even though the lender cannot charge you interest, other fees and costs can add up and increase the overall short-term loan costs.
  • Your credit score may go down: When you apply for a short-term, your lender will run a credit check. This results in an enquiry on your credit report, which will lead to a slight drop in your credit score. This isn’t usually an issue. However, if you make several applications at once, your score will quickly decline.
  • There may be legal issues: Once you sign the credit agreement for your short-term loan, you are legally obligated to fulfil all the terms and conditions. Any failure on your part to honour this can result in the lender initiating legal proceedings against you.
  • You may end up with a lot of debt: If you fail to repay your loan on time, you may end up with a lot of debt. Missed or delayed repayments can also result in lenders imposing penalties in addition to the fees charged. Given how expensive these loans are, you can end up in a worse-off position.

The exact eligibility criteria will differ between lenders. Usually, you need to fulfil the following requirements to receive a short-term loan:

  • Be at least 18 years old
  • Be a permanent resident or South African citizen
  • Should be able to provide banking history of the past 90 days
  • Shouldn’t have defaulted on another small amount loan application
  • Have a regular source of income

At ClearScore, we pride ourselves on partnering with the top lenders in the country Sign up or log in to find out whether you qualify for the most popular short-term loans.

Before you borrow money over the short term, it’s important to know which lender will give you the best offer. Here’s how to compare short-term loans:

  • Loan repayment terms: Repayment instalments are calculated based on your annual income, and having a longer repayment term may lead to smaller monthly instalments. Make sure to compare the repayment terms offered by each lender to determine the best offer for you.
  • The amount you can borrow: How much you can borrow depends on your ability to repay the loan, your credit score, and any other factors that the lender may consider relevant. You can compare the different offers you receive from each lender.
  • Funds processing time: Not all lenders take the same amount of time to process a loan application. If you need urgent access to a short-term cash loan, consider going ahead with a lender that has a quick processing time.

Before you apply for a short-term loan, find out how much money you can afford to allocate towards your monthly repayments. Use our free affordability calculator to determine this instantly.

The application process for short-term loans is similar to applying for any other loan. Here’s what you need to do:

1. Make sure you are eligible to borrow

Check the eligibility criteria of the lender that you plan to borrow from. In particular, find out whether the lender specifies a minimum credit score you may need to qualify as a successful applicant. If you’ve signed up to ClearScore, we will automatically connect you with short-term loans that suit your current credit profile, which includes the details on your credit report and your account information.

2. Complete the application form

You can complete your loan application online or offline. Typically, you will need to submit the following documents in support of your application:

  • Personal identification details
  • Current employment details
  • Bank statements for the past 90 days
  • Details of your monthly or annual income
  • Details of current outstanding debts

3. Wait for the assessment

Once you submit your application and relevant documents, the lender will begin their assessment. The majority will provide you with an answer on the day you apply, and you can expect to hear from your lender within an hour.

If your loan application is approved, you will receive a copy of the loan agreement for review and signature. Once you sign the contract and send it to the lender, the funds are directly transferred to you.

If the lender rejects your application, you should focus on improving your credit score before you apply elsewhere. Find out how to do this by taking one of our free coaching plans.

Since lenders have different criteria for approving credit agreements, there are several short-term loan providers that are willing to extend loans to borrowers with a lower credit score. Before sanctioning these loans, the lenders ensure that you have a source of income to repay the loan. If you can demonstrate that you have the means to repay, you are likely to qualify – even with a lower score.

They may charge you a higher interest rate compared to other borrowers because of the extra risk. However, they are still bound by a maximum interest of 21% plus the current repo rate.

Short-term loans can both increase and decrease your credit score. When you apply for a loan, the lender will make an enquiry to your credit report to determine whether you’re a trustworthy borrower. Unfortunately, enquiries will slightly reduce your credit score.

However, if you’re approved for a short-term loan and you diligently pay it off over time, your lender will take note of this good behaviour and report it to the credit bureaus. Since your payment history is one of the most important factors on your credit report, your credit score will improve significantly.

Overall, the enquiry will only cause a slight dip in your credit score. This can be fixed – and even exceeded – by a positive payment history.

A short-term loan will only have a vast negative impact on your credit score if you do not abide by your credit agreement. If you fail to repay your lender on time, they will inform the credit bureaus and your credit score will decline.

Short-term loans have higher interest rates because they are “unsecured”. In other words, they are not linked to an asset, such as a house or a car. This increases the risk to the lender, which results in them asking for higher interest rates.

For example, if you have a home loan, it will be linked to the property it was taken out for. If you default on your home loan, your lender will be able to repossess your property to recuperate their losses. This offers the lender more security and, in turn, they offer lower interest rates.

However, this isn’t the case with short-term loans. If you don’t meet your monthly repayments, the lender may never be able to get the money they lent you back.

Now that you know how quickly you can attain a short-term loan, you should stay on top of your finances and keep an eye on your credit score. Having a higher credit score will increase your chances of getting approved for a loan when you need it.

With ClearScore you can check your credit score and report for free – forever – and you can easily find out whether you have a “high” or “moderate” chance of qualifying for a short-term loan.

Helen Tippell  Image

Written by Helen Tippell

Digital Copywriter

Helen's our resident Digital Copywriter. She makes personal finance easier to understand so you can be ClearScore sure about your choices.