Everything you need to know about Short-Term Loans in South Africa

Best Personal Loan you can get in South Africa

Key takeaways

  • Very useful and helpful for both businesses and individuals
  • Short-term loans are readily available in South Africa
  • You can take a short-term loan to finance any need you face
  • Usually, short-term loans are used to finance unforeseen financial demands
  • Most of the borrowers in South Africa take short-term loans
  • Most lenders in South Africa are offering short-term loans

What is a Short-term loan?

In general, short-term loans are loans given out, and their repayment period ranges from as soon as possible to a maximum of a year. They are primarily strict and specific on their loan terms, like tenure and monthly instalments. Usually, short-term loans attract pretty higher interest rates than medium-term and long-term loans.

Statistics say that most businesses and people in South Africa prefer short-term loans to medium- or long-term ones. It is vital to note that there are many types of short-term loans you can get, and their terms are so different, and they can help you solve different financial needs.

Everything you need to know about Short-Term Loans in South Africa
Everything you need to know about Short-Term Loans in South Africa

Requirements for a short-term loan

  • It would be best if you were a South African citizen with a national ID
  • For some loans, you need your current payslip
  • Need for collateral for secured loans
  • For a faster process to get money, keep all your Know Your Customer documents in place for verification.

Advantages of short-term loans

  • Generally fast to give out cash.

Most lenders do not require verification steps other than your proof of income or payslip before giving you the money. This has bailed many families and financially stressed people across South Africa.

  • It may or may not require collateral.

Unlike most medium and long-term loans, most short-term loans do not ask you to provide security on loans. Even though some, like short-term mortgages, may require the asset bought as collateral, most short-term loans give you the freedom to choose your wish.

If you wish to attach an asset or not, it’s up to you because the options are so many and are easily accessible.

Easy to access and get money

Due to their relatively low loan amount, the default risk associated is also common. This makes the process easy and qualifies almost all the employed people in South Africa. Some even offer loans to people who do not have payslips.

  • Bad credit may not deny you money.

It’s not always the case that a poor credit rating may deny you a chance to get a loan. There are many types of loans that you can get despite having a bad credit history. Other personal loans, like bad credit loans, may guarantee money despite a poor background.

  • Short term commitment

By their nature of being short-termed, these kinds of loans do not cripple you for your whole life. It’s only a few months when you pay instalments; after that, you will be free to plan on other things.

This is not the same with long-term loans that may be attached to your finances for a very long time. They may go for a lifetime or even 20 years into the future.

  • Have little loan disadvantage.

Since the loan tenure runs for less than a year, you won’t have your assets attached for a very long term.

This is different to a long-term loan that may restrict the company from fully utilising the attached asset while paying up the loan.

Disadvantages of short-term loans

  • Small loan amounts

Because of their nature, short-term loans are the ones that give the lowest or smallest lowest loan amount to medium and long-term loans. This might be a limiting factor to large businesses and other individuals who are faced with heavy and demanding financial needs.

  • Loans are paid earlier.

The fact that the loan is short-term means that the deal must be closed quickly. As a borrower, you are expected to pay all the interest instalments and loan amounts quickly.

If your financial position has not been established, you may have more financial trouble than before.

  • High-interest rates

Short-term loans are the most expensive loans compared to other longer termed options. The high default risk associated with them attracts a very high-interest rate that has proved too much to bear for many borrowers.

  • It may affect your credit rating.

Any failure to meet deadlines on loan repayments or monthly instalments may affect your credit score. This creates problems when borrowing in the future.

  • Early repayment penalty

Sometimes, you may want to pay up your loan before its tenure is up. It’s unfortunate that most lenders are now charging a high penalty fee, as this will mean they don’t make money from their incurring interests.

Types of short-term loans

It’s fair to say that most of the loans you have heard of before are primarily short-term because of their popularity. Altogether, they comprise over 60% of the total loans given out in South Africa.

Among them include Payday loans, Car loans, personal loans, some mortgages and many other types of loans, as explained below.

PayDay loans

This kind of loan feels like an advance to your next payday. When you feel the pressure of wanting money now. Payday loans are usually due on your next payday clearing the loan amount you had when you tried to cover your needs.

Usually, Payday loans attract a very high-interest rate and many policies are being put in place to monitor and manage the increasing rates. Usually, the salary of the borrower determines the loan amount that can be given out. One can not get a loan amount that is above their salary cap. This loan does not require the borrower to have collateral to get a loan.

  • Easy to get

Payday loans are generally easy to get with the salary guaranteed, and you can apply for them online. If you are using your bank, there may be no paperwork to get the money you want.

This easiness of getting money has proved to be a key selling point to many lenders of PayDay loans. This is what the majority of people in South Africa love about loans, and you may want to experience such a service.

  • Generally unsecured

Payday loans are not secured with assets, giving you greater freedom to use or trade your assets. It also removes the risk of losing your valuable assets if you default on the payment. However, it is critical to understand that the lender may take all the money from your pay if you fail to comply.

  • You can get money with a low credit score.

More often than, Payday loan lenders are likely to accept your application despite your poor credit history. This is primarily because of the guarantee they get from your salary and the level of competition in the industry.

You can then use this advantage to pay your dues in time and improve your credit score for future and larger loans.

Disadvantages of Payday loans

  • Generally addictive

PayDay loans look like the safest loan you can get, and that is its main disadvantage. More often than, the majority of people in South Africa find themselves in a credit snare with no financial freedom at all.

The risk that you may fail to pay instalments is higher with Payday loans, and this has made many borrowers struggle and end up servicing a loan with another loan. The result is a lack of financial freedom.

  • Some lenders may end up using a controversial collection method.

Over the years, Payday lenders are generally known for their poor client management once the loan is given out. Most of them used to hold you for ransom and used controversial methods to take back their money.

This was possibly caused by many borrowers not paying their instalments, but even the friendly and abiding borrowers may face the consequences.

Personal loans

Another type of short-term loan option is a personal loan. The most significant difference it has with a payday loan is its extended repayment period. Personal loans can stretch for a year or even over a year for the loan to be fully repaid.

Despite most of them being short-term, a few other personal loans can enter into the medium-term loans given due to their repayment period and loan amount. Personal loans usually offer a higher loan amount than a payday loan restricted to your payment amount.

Also, Personal loans can either be secured or unsecured; this means that on some or most personal loans, you may not need to provide any collateral. However, some personal loans, like Car loans, may require collateral.

Advantages of Personal loans

Fast access to money – many lenders pride themselves in giving same or next-day funds. This means that you will be able to cover all your emergency needs before you sink into trouble.

There is no need for collateral – You don’t have to pledge assets if they fail to pay back the loan, which gives you the freedom to use your assets without anyone monitoring your business.

Borrowing limits are flexible – You can choose how much money you need. This may, however, depend on the lender who is giving you money. It may also depend on your credit rating.

You get favourable interest charges compared to most debt options. Generally, most personal loans are cheaper and have very flexible terms that you can discuss with the loan provider.

The cash you get through a personal loan can be used for anything. Most personal loans are not specific loans like vehicle or asset financing. This means that the lender does not get to dictate how and when you have to use the money. This gives you much freedom to use your money to please you.

Lines of credit

This kind of financing happens when the lender promises to lend the borrower a certain amount when an unexpected financial need arises. The most common line of credit is the credit card for individuals and businesses.

The lender will take his money directly from the borrower’s bank account at monthend. This is when the user/borrower uses the money before but with a limit set. The amount to be used depends on how much the borrower used during the month, with a maximum of the agreed limit.

Despite being similar to a Credit card, Lines of credit have advantages and disadvantages.

Advantages of Lines of Credit

  • Relatively cheaper 

Compared with a Credit Card, most lines of credit attract a significantly lower interest rate, making them a cheaper option.

  • Helps to control expenditure (Impulse buying)

The easiness of a Credit card to transact has proved to be a severe temptation to many holders. They end up buying unnecessary things that they don’t need. A Line of Credit can quickly solve this by making it difficult to access. This process makes you think and make conscious decisions on your expenditures.

  • Easy to access cash

A line of credit is arguably one of the fastest facilities to get cash from when you are stranded and need money. Usually, you may have it in your hand within 24 hours, which is faster than mortalities like Credit cards that take around two working days to process cash.

  • Generally unsecured with assets

Most Lines of Credit are unsecured loans that you can openly use. This means that if you fail to pay the loan amount, there is no chance you will lose your essential assets.

This may even give you room to sell the assets at your own pace and pay the outstanding balance. You may remain with the extra cash if the purchase has more value.

Invoice financing

This form of loan is based on the company’s account receivables. They look into the short-term debtors who may be paying in a short period of coming. This is more of a company payday loan. When the debtor pays, the lender will take their money with interest and forward the rest to the borrower. The limit of Invoice financing is capped at the value of the borrower’s accounts receivables.

Advantages of Invoicing Finance

  • You can get funds instantly.

Once you have signed the contract with the fund’s provider, you may get your funds immediately. The buyer of the invoices may want to confirm and get in touch with the debtor to ensure the invoice’s authenticity. After that small process, you may get your money to move the business forward.

  • No collateral 

Since the arrangement is more of a buying and selling arrangement, there is no asset attachment that may cripple some of the company’s productive assets.

External short-term debt in South Africa

Over the past years, there has been a rise in short-term external debt. This has since played a big part in stabilising the South African economy as more and more businesses could easily access funds from outside the country.

This facility is still to reach most individuals as of 2021, but it has been a critical income source for many businesses.

As of June 2022, the national external debt short term stood at USD33.8 billion, more than the previous quarter by USD2.5 billion. Despite this significant increase, the highest figure came in 2019, when we borrowed a record high of USD 37.3 billion. The 2019 external debt was reflected in the national statistics and showed an improved standard of living in South Africa.

The general fall in external debt is also a consequence of the Covid-19 restrictions that have affected the world. This has led to sales falling across South Africa and many lost jobs.

Hence, such an increase is most welcome and will undoubtedly play a crucial part in developing our economy.

Impact of short term government credit extension

It’s been a time of consistent growth, with private sector short-term credit rising as of September 2022. This has also occurred with all types of loans, including medium- and long-term loans.

The gradual increase in private sector credit boosted sales during those times. The more money injected into the system meant that both companies and individuals had more disposable income.


805 thoughts on “Everything you need to know about Short-Term Loans in South Africa

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