A payday loan is a short-term credit option, available easily and quickly with minimal credit checks; resolve your cash emergency today.
They can be useful in certain cases, but in others they may get you into serious financial trouble. That is why it is best if you learn more about them and their cost, benefits and risk in advance.
Use the information and advice provided below to make the best borrowing decision.
Understand the basics of Payday loans in Australia
These loans enable you to borrow small loans up to AU$1,500. The repayment term is determined by your next pay day. However, it cannot be shorter than 16 days under the new rules valid since July 2013. Usually, the maximum term is 30 to 40 days. The repayment is usually made automatically.
When you take out the loan, you sign a direct debit order enabling the lender to withdraw the principal amount plus interest, fees and other charges directly from your bank account on your next pay day.
You may be able to extend the term of the loan. However, this will come at a considerably high price. The lender will continue to charge interests. Besides, additional fees may apply. In this way, it will certainly become more difficult for you to pay back what you owe.
It is fairly easy to qualify for payday loans even for people with bad credit. Not all payday micro lenders perform credit checks and the ones that do this may not necessarily take your credit history into account.
Interest, Fees & Total cost of the loan
The payday loans have some of the highest interest rates and fees in the Australian market for credit products.
Another factor for their high cost is the charging of interest on a daily basis rather than on a monthly or annual basis. If you borrow AU$ 100 for 30 days, for example, you will have to pay back AU$ 125. If you do the math, you will see that the cost of borrowing is much higher compared to the cost of using a traditional personal loan.
Effective & Safe
These loans are designed to help you in cash emergencies when you have no other solution to opt for. If you use them for their main purpose, you will stay out of trouble. If your car requires urgent repair, for example, it makes sense to borrow the money quickly and to get the vehicle back in order so that you can go to work and earn income.
You will have to put up with a limited budget during the next month, but you will get back on your feet quickly.
It is important for these loans to be used as one-off solutions. If you regularly find it difficult to pay all of your living expenses with your income, then these loans will not help you to fill the gaps in your budget. They will most certainly make the situation even worse. Similarly, if you are already struggling with repaying debt, taking out an expensive loan will only increase the total amount which you owe to creditors.
You must be aware of the implications associated with getting into debt because of a payday loan. The default will be recorded on your credit file and you will have much lower chances of qualifying for loans from banks. Your case may be transferred to a debt collector who will use a variety of means to get you to pay back what you owe. If the lender sues you, you can lose valuable assets.
It is worth pointing out that the default on the repayment of any type of loan can lead to these problems. However, there is a higher risk of defaulting on a payday loan due to the high cost and the short repayment term.
Extending the repayment term of such a loan is not a particularly effective solution either as the total amount which you owe will continue to grow over time.
In Australia, most providers of payday loans are small micro lenders.
Banks have still not entered this niche on a large scale. It is important for you to choose a micro lender licensed by the Australian Securities and Investment Commission. In this way, you will get the highest level of consumer protection available. Still, you have to keep in mind that the payday lending process does not vary considerably from one provider to another.
You will have to incur the high cost of borrowing and repay what you owe in a short period of time. Virtually all lenders require borrowers to sign direct debit orders.
Alternatives to Payday Loans
Even though these loans may seam the easiest and quickest resolution to a financial emergency, you should know that there are other options. Check out the main ones:
- Set up an emergency fund – You can set aside a small amount of money every month and keep the fund in a savings account so that you earn interest. That way, you will have emergency cash at hand at all times.
- Boost your credit – If you have good credit history, you will be able to qualify for the less expensive unsecured personal loans available from banks.
- Use a credit card to get cash – The best credit card to use in a financial emergency is the one with the lowest interest rate and fees on withdrawals.
- Use an unsecured bank loan – You can compare different products to pick the cheapest one.
- Get another job to earn extra income – You can readily find part-time employment which will enable you to cover all of your living expenses without the need to borrow money.
- Get better repayment terms on your current loans through negotiation – This will give you more free cash to use during the month.
- Use an overdraft – With this facility, you can use more money than the amount which you have in your bank account. Interest rate and fees apply, but the cost of borrowing will certainly be lower compared to the cost of a payday loan.
- Check out P2P loans – These loans are available from private persons participating in peer-to-peer lending platforms. You can get lower charges and more flexible repayment term than with a payday loan.
Making an Application
In order to apply for a payday loan, you will need to present:
- A copy of your Australian ID
- Payslips, usually for the past 3 months
- Bank account statements, typically for the last 3 months
Lenders base their decision primarily on your income. If you have a regular job and earn a fairly high salary, you have the best chances of approval. Still, many lenders work with borrowers in less favourable positions as well.
Payday loans are useful one-off solutions for cash emergencies, but they are dangerous to use regularly. Their main advantages are easy accessibility and speed.