- Cash loans can provide affordable credit to people in an emergency.
- People with good credit histories have the best chance of accessing low interest borrowing.
- A zero percent deal on a credit card can be another convenient cash injection.
If you’re faced with a family emergency, a vet bill, or a broken-down car, you might find yourself needing to borrow money to cover those expenses. While some people are fortunate enough to have access to an emergency fund, for many people, unexpected expenses are financially crippling.
Short-term loans used to be very popular with people who needed a little extra cash to tide them over. However, the interest rates charged by so-called payday lenders are usually very high, making this type of borrowing potentially harmful in the long term. Installment loans offer a more affordable option and can help spread the cost of a financial crisis.
Mirosabziro / ShutterstockConsider Your Options Before Taking a Loan
Your parents may have taught you “never a lender or a borrower be,” and that can be wise advice if you’re inclined to take loans for frivolous purposes. However, there are times when borrowing makes sense. If your car breaks down and it would cost $1,000 to have it fixed and get a courtesy car for the day, it’s better to pay a small amount of interest to get back on the road than to lose a week’s worth of income because you couldn’t afford the repairs.
Installment Loans vs. Payday Loans
When you’re considering borrowing money, it’s important to think about the interest you pay. Short-term loans can have interest rates as high as 48 percent p.a., which makes them a costly option that should only be considered as a last resort.1 These lenders charge so much because they’re usually willing to work with people who have poor credit histories. Installment loans have stricter lending criteria and offer lower interest rates, so they’re an obvious choice for anyone who qualifies for them.
No Interest Loans for Low-Income Individuals
Installment loans usually charge interest of between six percent and 12 percent, depending on the lender and the borrower’s credit rating. No Interest Loans (NILS) are sometimes available. Australian residents who are on a low income may qualify for a No Interest Loan of up to $1,500.2 There are strict limitations on what these loans can be spent on, but eligible individuals can have a loan approved within 48 hours in many cases, providing a valuable lifeline to those in need.
Other Affordable Borrowing Options
Another potential loan option is the NILS scheme, but it’s only available only to those on a low income and features restrictions regarding what the funds can be spent on (plus the smaller nature of the loans) mean they aren’t an option for everyone. If you need a larger loan or a stopgap loan to cover living expenses, you’ll need to look at other options, such as credit card deals, less mainstream installment lenders and credit unions.
Consider Credit Cards With 0% Deals
Many credit card providers offer zero percent deals on purchases or balance transfers. These are usually time-limited deals that can be a useful solution for people who need to borrow money for a short time. However, the high-interest rates charged by credit card companies once a zero percent deal ends mean would-be borrowers should only consider a zero percent deal if they’re certain they can clear the balance before they start being charged interest.
Unsecured Loans
For larger loans and borrowing to be spread over a period of a year or more, an unsecured loan could be a good choice. There are many lenders that will offer unsecured same-day loans of up to $15k to people who have an income and a reasonable credit history. It can even be possible to borrow much larger amounts, depending on your circumstances. Be aware that missed payments could severely damage your credit score, making it much harder to access affordable credit in the future.3
Secured Loans
Would-be borrowers who don’t quite meet the criteria for an unsecured loan may find a secured loan is an appealing option. However, it’s important to remember the level of risk associated with secured loans. If you fail to make the repayments on a secured loan, the lender can repossess the asset you put down as collateral. This is why lenders are more flexible with who they’re willing to give secured loans to. Only use a secured loan if you’re absolutely sure you’ll be able to make the repayments.
Credit Unions
A credit union is a not-for-profit financial institution. It works just like a bank and is subject to the same regulations, but because credit unions are run for the benefit of their members, a credit union can serve people banks would be less willing to work with. There are many credit unions, or customer-owned banks, in Australia.4 Consider working with a credit union if you’re struggling to access finance elsewhere. Some credit unions will offer loans to members whose accounts are in good standing, without requiring a credit check.
Peer-to-Peer Lenders
Similar to credit unions, peer-to-peer loan companies offer access to loans that are funded by other users. Some users invest in loans, being paid interest on the loans as the borrowers repay them. The investors can choose the level of risk they’re willing to accept. Many peer-to-peer lending companies offer loans to people who traditional lenders aren’t willing to support. These companies do usually expect people to go through a credit check, however.5
Make a Budget Before You Borrow
Before you borrow money, whether from a bank, credit union or the NILS programme, make sure you know what your budget is and what you can afford to pay back. If you’re borrowing because of an unexpected financial emergency, try not to fall into the trap of assuming you won’t have to worry about other emergencies during the term of the loan.
Your budget should ideally include some savings put towards an emergency fund, so any future unexpected expenses don’t leave you needing to take out another loan. If you’re spending all your income every month once you factor in loan repayments, this likely means the loan is unaffordable, and you should revisit your budget.
Clear High-Interest Debts as a Priority
One thing to consider when looking for a loan is whether you can use that loan to consolidate other debts. If you’re paying 20 percent or more interest on a credit card, and you’ve got the option of quick approval for a loan at less than 10 percent, using part of that loan to clear your credit card debt could make financial sense in the long term.
This applies only if you don’t then run up new credit card debt. Think carefully about why you ended up with debts before you try the debt consolidation approach. It will take good financial discipline to make sure you clear the installment loan and continue to live within your means.
Get Help if You’re in a Financial Crisis
If you’re struggling to pay your bills or you have debts and you’re not sure how to handle them, there are several charities and government organizations in Australia that could help you. They are:
- The National Debt Helpline offers free, confidential advice to people who are in debt and struggling to cope.6
- Way Forward provides free hardship advocacy and debt solutions, including arranging payment plans for creditors.7
- The Indigenous Outreach team works with Aboriginal and Torres Strait Islanders who are struggling with their finances.8
In addition to the above service providers, most government organizations, utility companies and lenders have dedicated teams that will work with customers or users who are struggling to pay their bills. If you’re facing financial hardship, speak to your creditors before trying to solve the problem by taking on more debt. It may be possible to come to a payment arrangement to reduce your bills in the short term, helping you get some financial breathing space.
