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Do Short Term Loans Affect Your Credit Rating? Understanding the Impact

short term loan affect credit rating
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When navigating the financial landscape in South Africa, understanding credit and the factors that impact your credit rating is crucial. One common question many people have is, “Do short-term loans affect your credit rating?” The short answer is yes, they can. However, the impact can be positive or negative, depending on how you manage the loan. Let’s delve into this topic in detail.

What is a Short-Term Loan?

A short-term loan is a loan that is typically repaid within a year. In South Africa, short-term loans are often used to cover unexpected expenses or cash flow shortages. This could include anything from an emergency medical bill to an unexpected car repair.

How Short-Term Loans Affect Your Credit Rating

When you apply for a short-term loan, the lender may perform a hard credit check to assess your creditworthiness. This check can temporarily lower your credit score by a few points. However, this dip is usually short-lived, and your score should recover over time.

Once the loan is disbursed, making all your repayments on time is crucial. Timely repayments positively influence your credit rating, demonstrating to lenders that you can responsibly manage and repay borrowed money.

On the other hand, failing to repay the loan on time or defaulting will negatively affect your credit score. Late payments are recorded on your credit report and can lower your credit rating, making it harder to obtain credit in the future.

What to Consider Before Taking a Short-Term Loan

Before applying for a short-term loan:

  1. Consider whether you can afford the repayments.
  2. Understand the loan terms, including the interest rate, fees, and repayment schedule.
  3. Consider your need for the loan. If it’s not for an emergency, there might be better alternatives that don’t require borrowing.

Another consideration is the lender you choose. In South Africa, always make sure the lender is registered with the National Credit Regulator. This guarantees they comply with the National Credit Act, which protects consumers.

Read this article for more information about what to consider before applying for a loan in general.

Conclusion

Short-term loans, like any credit, can impact your credit rating. It’s important to manage any loan responsibly and ensure you can meet the repayment terms. If you do this, a short-term loan improves your credit rating over time. Remember, maintaining a good credit rating is vital for your financial health, as it affects your ability to obtain credit or loans in the future.

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*Representative example: Estimated repayments of a loan of R30 000 over 36 months at a maximum interest rate, including fees of 27.5% APR would be R1 232.82 per month. BetterLoans is an online loan broker and not a lender. Our service is free, and we work with NCR-licensed lenders in South Africa. Interest rates charged by lenders can start as low as 20% APR, including an initiation and service fee determined by the lender. The interest rate offered depends on the applicant’s credit score and other factors at the lender’s discretion. Loan amount R500 – R350 000. Repayment terms can range from 3 – 72 months. The minimum APR is 5%, and the maximum APR is 60%.

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