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How Do Payday Loans Work?

How Do Payday Loans Work?

Payday loans are a short-term borrowing option for those who need cash fast. While at first, they can seem like a great option for those strapped for cash, payday loans can be problematic in the long run. The high fees associated with these loans can lead borrowers down a pathway of debt, both harming their credit score and jeopardising their financial future in one.

Thankfully, there are plenty of options to get fast cash that doesn’t involve taking out a payday loan. Read on more to learn about how payday loans work, and what other options are available to you today.

What are payday loans and how do they work?

Payday loans are a type of loan that provide customers with ‘instant’ cash. People usually take out payday loans to cover household bills, car repairs, medical charges, or other last-minute costs that pop up between paychecks. Repayment periods typically range between 16 days and one year. Many lenders will line up repayment dates with customers’ pay, to ensure they have the funds to cover these charges. As such, they are considered a short-term solution and are not wisely used as a long-term fix to financial difficulties.

As payday loans are usually unsecured, the maximum borrowing amount is capped at $2,000. While this acts as a deterrent for customers taking out larger sums from the one lender, there’s nothing stopping them from taking out multiple payday loans from separate lenders – which is how so many Australians land themselves in payday debt each year. Many lenders won’t conduct a full credit check on application, meaning customers aren’t assessed for financial stability before receiving their funds.

Australian law prohibits payday lenders from charging interest on these short-term loans, due to their fast turnover. In lieu of interest, however, lenders can charge extremely high fees each repayment period that can easily send customers into debt.

If you’re interested in learning more about the basics of payday loans, click here.

How to pay off multiple payday loans

It’s easy to get stuck in a cycle of debt when it comes to payday loans. Whether you’ve found yourself struggling to pay off multiple loans, or you see yourself going down the wrong path, it’s important to understand how you can improve your financial situation as quickly as possible.

One way to alleviate this financial stress might be payday loan consolidation. This involves taking out a (typically) lower-rate personal loan to consolidate the original debt – therefore reducing your multiple charges through one singular debt. The reason why these personal loans tend to have lower rates of interest is that they take into account an applicant’s credit history, income source, and overall debt – and may even offer the option of collateral to secure a more competitive rate.

There are many benefits of consolidating your payday loans, some of which include:

  • Saving money, through paying less fees on the one loan as opposed to multiple loans;
  • Improving credit, by making stable repayments and improving your credit score over time;
  • Protecting your financial future, by reducing your multiple debts;
  • Securing a more flexible repayment schedule and period.

How do I consolidate my payday loans?

Payday loan consolidation is the most effective way to reduce payday loan debt. But how does consolidation actually work?

The process of consolidation is similar to that of regular personal financing. The customer can apply for one big loan, to pay off their multiple smaller loans. There are plenty of online lenders who specialise in payday debt consolidation, who may be more willing to assist than traditional lenders are. Due to payday debt largely being associated with poor credit scoring, the majority of customers take this flexible path when consolidating their debts.

Once finding a lender that suits your needs, you can apply for a debt consolidation loan and (if approved) migrate all of your payday debt into one place – reducing your overall fees and streamlining your repayments.

Payday debt consolidation is intended to alleviate extreme fees that multiple payday lenders charge on debt; as such, it’s very important to shop around and find a personal loan lender that is right for you and will secure you the best deal possible. If you’re not sure where to start, Pocket Cash can lead the way – chat to our friendly customer service team here.

How to get approved for a payday loan

Payday loans are easily accessible to the majority of Australians. They are widely considered to be a flexible and inclusive lending option, but that doesn’t mean every application will be successful. There are various pitfalls that can cost application success, and it’s important to be aware of these if you’re considering an application.

  • Look for a flexible lender: If you struggle with poor credit, it’s important to look for a flexible lender who accepts bad credit customers. Most traditional lenders won’t offer personal finance to people with low credit, so it can save you time and energy going straight to a reputable online lender.
  • Don’t over-borrow: It’s important to be savvy with your borrowing amount. While you might be eligible for a $2,000 loan, you should only borrow the exact amount you require, as this will reduce your repayment costs and fees.
  • Don’t over-submit: It’s important not to submit too many applications at one time. If you’re needing urgent cash, it’s a better idea to apply to one lender and wait for a response, as applying for multiple loans in a short period of time can harm your credit score. A benefit of applying through online lenders is their fast response time, so you shouldn’t be kept waiting too long to receive a reply.

Final note

If you’re searching for some extra money to get you through the holiday period, cover the cost of car repairs, or get you sorted for your next electricity bill, look no further than Pocket Cash. We specialise in finding everyday Australians a loan term that suits their needs, and take pride in offering each and every customer the best service possible. So, if you’re not sure where to start with personal finance, have a chat to our team today to discuss your options.

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