Cash Loans: What to Look Out for Before Applying
Applying for a loan in New Zealand can sometimes be a stressful process and there are several important things you need to look out for. It’s important that you understand the terminology being used and you should always seek independent financial advice.
Applying for a loan can be broken down into the following points of difference:
- Application process
- Security required
- Loan period
1. Cash loan application process
How long does it take to apply for a cash loan?
It can take anywhere from a few minutes to several hours to apply for a cash loan in New Zealand. Modern online lenders like QuickCash however, offer an online application form that can be completed in 3 minutes. Traditional office/shop based loan providers will take longer as you often need to visit them in-store. Depending on the paperwork required, you may have to source documents from the bank.
How soon can the money be in my account?
This will depend on the provider and the time of day you apply. Modern online lenders can often deposit the money in your account inside an hour, but only within banking hours (Monday-Friday, 9am-4.30pm). Modern lenders like QuickCash can provide instant clearance of your funds whilst some lenders will not be able to give you access to your cash until the next business day.
Be conscious that the cash will only be deposited once your loan has approved, so if your application takes a long time to process, it will take longer to receive the funds.
What documentation will I need to apply for a cash loan?
In New Zealand, lenders are require by law to verify an individual’s identity and physical address under the Anti Money-Laundering and Countering Financing of Terrorism Act 2009.
You will need to provide a copy of a valid passport or driver licence. Some lenders will accept 18+ Cards and Firearms Licences, but others will not due to the increased difficulty in verifying them. Online lenders will often request that you enter ID numbers and expiry dates for passports and IDs and may request that you send a photo of the physical document. In-store lenders will often require you to present those documents in person.
Note: Some lenders will be unable to verify your passport and may not be able to use a passport as a means of identification.
Lenders can often verify your address from your credit report, which they can access and verify with your ID information. If your credit report fails to verify your address, you may be required to produce a bank statement or utility bill.
2. Is security required for a cash loan?
What is the difference between a secured and unsecured loan?
Loans are either secured or unsecured. “Secured” means that the lender has taken a legal claim over an asset (referred to as security or collateral) in the event that the borrower defaults on a loan.
An unsecured loan means that no security/collateral is required. If the loan provider approves the loan, they cannot seize assets from the borrower in the event that they do not make repayments. That being said, they can pursue other legal channels to recoup the debt, such as wage attachments or court-ordered collections.
What can I use as security?
The most common forms of cash loan security in New Zealand are vehicles and real estate. Some lenders will also allow you to use boats, caravans, tools, and art (among other assets).
Be aware, you must legally own that asset and the lender will be interested in whether any debt is associated with it to establish “how much of the asset do you, in theory, own?”. For instance, a car valued at $5,000 with a $2,000 loan against it means that the owner has equity of $3,000 in that car, not $5,000.
Do I Need Security to Get a Cash Loan in New Zealand?
Some lenders will require security, others won’t. QuickCash will offer both secured and unsecured loans, such as unsecured loans up to $500 and secured loans for loans up to $20,000.
3. Cash loan interest rates
What are interest rates for loans?
Interest is the premium you pay for borrowing money. It is expressed as a percentage (the “interest rate”) which is applied to the amount of money you have outstanding on your loan to calculate interest repayments.
Interest rates will vary depending on the provider and the credit profile of customers. You can see an example of interest rates for mortgages (home loans), credit cards and personal loans at interest.co.nz.
An interesting example
As a simplified example, if you were to borrow $100 at an interest rate of 20% per annum (per year) then you would be charged $20 interest for that year. You would need to pay back the principal (initial amount borrowed) of $100 and the interest of $20, so a total of $120.
Although that seems straight forward, be aware that some loan contracts are more complex due to a factor called compounding interest.
Look out for compounding interest
Although the example above talks about a $100 loan at 20% per annum, this is highly unlikely to result in a $20 interest charge. That’s because loans compound their interest periodically and most will compound interest monthly, or daily. This makes a big difference in the amount of interest a lender has to pay.
Compounding means that at the end of a period, an interest charge is reapplied. For example, if a loan had monthly compounding, it means that an interest calculation would be made in February based on the outstanding balance of the loan in January. Then again in March on the previous month’s balance, and so on.
This doesn’t mean you’ll be paying 20% in February and then 20% again in March. That’s because interest rates are always expressed on an annual basis (per annum). So the monthly interest rate would be calculated from that. Using the same example of a 20% p.a (per annum) interest rate, applied to a $100 principal but now compounded monthly, the interest charge would be $1.67 every month. That’s calculated by dividing the annual interest rate by the number of compounding periods (20% / 12 = 1.67%) and multiplying that by the amount outstanding.
Look out for Annual Interest Rate v Effective Annual Interest Rate
How regularly interest compounds can make a huge difference to the balance of your loan and how much interest you have to pay. Particularly if you fall behind on payments or are not clearing interest as regularly as it compounds.
That is why it’s important to pay attention to how regularly interest compounds and consider the effective annual rate as opposed to the advertised annual interest rate.
The annual interest rate is the rate you will see on advertisements. It tends to be a nice almost-rounded number like 9.99% or 19.95%.
The effective annual interest rate is what that rate will be once you adjust for the effect of compounding.
The table below compares what 20% p.a results in as Effective Annual Interest.
Annual Interest Rate = 20% p.a
|Effective Annual Rate||20%||21.94%||22.09%||22.13%|
Notice how the interest rates differ substantially based on how regularly they compound. All four of the examples above would have been advertised at 20%, yet they vary greatly all due to how regularly they compound.
4. Period of the Loan
How long should I borrow money for?
There is no single answer to this question. How long you should borrow for depends on how much you need to borrow and how much you can comfortably repay each period.
Most providers will give you the option of paying weekly or monthly. Online lenders will often use interactive tools to allow you to structure your cash loan so that you can visualise how much each repayment will be and over what period. QuickCash provide a good example of this with our loan sliders.
What’s the shortest period I can borrow for?
Payday lenders allow you to borrow for a matter of days. Be aware though that this industry makes its money on interest, which is earned over time. So short term lenders will often charge incredibly high-interest rates, as they may only have ten days to earn interest. This is particularly dangerous if for some reason you fall behind and get trapped at that higher rate beyond the initial period of the loan.
What’s the longest period I can borrow for?
Home loans in New Zealand are typically over 30 years, whereas personal loans under $20,000 are typically limited to 1 – 5 years. Business loans are far more bespoke and will depend on the nature of the business and industry.
What fees are involved in a cash loan?
Different loan providers have different fee structures and it is important that borrowers take the time to read and understand the fees involved in a loan.
Below is a list of fees that commonly appear on loan contracts.
The establishment fee is a one-time fee for the creation of the loan. Loan providers charge that fee to cover the costs of processing the loan application, creating the loan contract, running credit checks and registering security.
Administration fees cover the ongoing administration tasks that are associated with a loan. These can relate to processing/reconciling payments, generating and distributing statements and establishing payment arrangements. This fee can be charged daily, weekly, monthly or annually, depending on the provider.
Default fees are charged when a borrower defaults on their loan (misses payments) and vary depending on how far behind on payments a borrower is. There are a variety of different default fees ranging from a late payment fee to penalty interest and fees related to security repossession. Be sure to take the time to read these in any loan contract as they will differ from provider to provider.
Early repayment penalties
Certain providers will charge you if you repay the loan ahead the contracted time. Although that may sound illogical (don’t they want to be repaid as soon as possible?), in reality, lenders make a lot of money off interest, and interest is charged over time.
Certain providers will charge an early repayment fee or a “break fee” but others choose not to as a way of attracting customers with good payment habits. Be sure to pay attention to whether or not there is an early repayment penalty when considering a loan contract, particularly if it is your intention to clear the loan as soon as possible.
QuickCash have no early repayment fees, as we’re happy to help our customers pay off their loans as quickly as possible.
If you have any questions regarding our NZ loans or the loan application or repayment process, please feel free to contact our support team on 0800 784 252.
Disclaimer: This article is intended to provide general information only. It does not take into account your financial needs or personal circumstances. It is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.