5 Questions to Ask before You Take a Short-Term Loan

If you ever find yourself a little short on cash a few days before payday, you might have considered taking out a short-term loan to tide you over until the money hits your bank account. Sure, payday loans have a higher interest rate than ordinary loans, but they can be terrific financial tools if you use them carefully. Here are five questions to ask yourself before you apply for one.

Do you really need the extra cash or do you just want it so you can buy something you like?

This is important. Short-term loans should only be used in case of a financial emergency and not just because you see something at the store that you want. The interest rates are too high to justify using this type of loan for anything other than true need.

Have you exhausted all other sources of credit?

If you've already raided your emergency savings and asked all your friends and relatives if they could loan you a few dollars until payday, then is the time to consider a short-term loan. If you have other sources of cash, though, it's better to use them.

Did you shop around for the best terms?

The internet makes it easy to shop different short-term lenders, like Mobile Money Australia, and see what kind of loans are offered. You should compare not only the interest rate (or the fees that the lender charges) but also the length of the loan and the penalties for not making your payment on time.

Per the ASIC (Australian Securities and Investments Commission), 'short-term loans' have been prohibited since 2013. These are defined as loans of up to $2000 with a due date of 15 days or less. The only loans that are permitted are loans with a due date of greater than 15 days. Fees are limited to 20% of the upfront amount and interest cannot be charged in an amount that is greater than 4% per month.

Did you verify that the lender you chose is real?

There have been a lot of scammers taking advantage of gullible Australians, by buying up Australian domain names to make it seem like they are a legitimate Australian business. All short-term lenders must be registered with the ASIC, so check there first to be sure you are dealing with a company that is permitted to issue this type of loan.

Do you know, without a shadow of a doubt, that you will be able to pay back the loan and all associated interest and fees when it is due?

If you have any thought at all that you might not have the money to pay the debt when payment is due, then you really should consider not taking out a loan of this type. There can be serious financial consequences if you are unable to pay your loan back.

Taking a short-term, high-interest loan can be a strategic part of your financial toolbox, if you know what you are doing and if you structure it properly. Just make sure you do your due diligence and take the right precautions.