Understanding the different types of short-term credit

Ujuh Reporter

For South African consumers wanting to get their finances in order for 2018, one of their biggest challenges will be the availability of short-term credit. Technological advancements have made short-term finance more readily available and easier to access than ever before, but rather than empowering many consumers, this is consigning many to a long-term struggle with debt.

In this guide, we’re going to discuss many of the different types of short-term credit to help you to get to grips with this often misused financial product.

When might short-term credit be useful?

Short-term credit can help to plug a gap in your finances when you’re faced with an unexpected bill or expense. For example, if you have to pay for medical treatment, have an unexpected car repair or have to wait longer than usual for your pay, short-term finance can give you access to the money you need to make ends meet. However, this type of finance is also commonly used to pay for evenings out, holidays and other lifestyle expenses and it is this that is getting many into trouble.

The different types of short-term finance

Credit cards

A credit card is a flexible credit facility that allows you to borrow up to a certain limit. Credit cards are issued with a specific spending amount which you cannot exceed and with an agreed rate of interest you have to pay. The debt can be accrued or paid off at anytime.

Each month you must pay off a minimum sum, with any remaining amount gathering interest. If you don’t make the minimum payment this will be recorded on your credit history and could lead to a rise in the increase rates you have to pay in the future.

A more cost-effective way to use a credit card is to pay off the full amount within the first month. Then you do not have to pay any interest on the purchase so you can effectively borrow the money for free. Here’s everything you need to know about credit cards.

Payday loans

Payday loans have been much maligned over the years but if used in the right way, they can be a useful product. Payday loans allow you to borrow a small amount of money over a short period of time which you typically pay back all in one go.

Fees and charges can apply to payday loans if you do not repay the money in full by the deadline. For that reason, you should only ever apply for a payday loan if you are sure you can pay it back. Here’s a guide to better understanding payday loans from South African lender Wonga.

Overdrafts

Many banks also make a credit line available to private individuals and businesses on an ongoing basis in the form of an overdraft. An overdraft is quite simply an extension to a current account that allows the user to spend more money than they have in the account.

The overdraft should be arranged with the bank before it is used and the overdraft limit and rate of interest should be agreed. If you are self-employed and have a fluctuating bank balance or receive an unexpected bill, the ability to go into debt at short notice can be useful. You can find out everything you need to know about overdrafts here.

Do you frequently use short-term finance? What form of credit do you use and why? Please share your thoughts with our readers in comments below.

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