Are you wondering what payday loans are? If so, you’ve come to the right place. Here at Pocket Cash, we’ve broken down the complicated nature of payday loans to give you the info you need in bite-sized chunks.
Read on to find out all you need to know about these types of loans, and how they can impact your financial future for years to come.
Payday loans are a short-term option when it comes to borrowing a small amount of money. The maximum borrowing amount is capped at $2,000, with repayment periods between 16 days and one year. Repayments are typically lined up with your pay, to make the process as seamless as possible.
Payday loans can be thought of as a financial buffer between paychecks. Whether someone is needing instant cash to pay off a bill, grabbing last-minute Christmas presents, or organising car repairs, payday loans are widely considered as a useful tool in time-sensitive situations. There are hundreds of online payday lenders out there who offer ‘instant’ borrowing, and application processes that take only minutes to complete. The convenience and simplicity of these loans is what attracts so many financially-stressed people to apply.
Unfortunately, not all that shines is gold. To compensate for their instant nature and fast turnaround time, payday loans tend to attract incredibly high interest rates and repayment terms, which can quickly send borrowers into a cycle of debt.
Payday lenders are legally withheld from charging interest to borrowers. To dodge such restrictions, lenders therefore charge exorbitant fees on their loans. ASIC states that payday loans have a maximum borrowing amount of $2,000, and are only allowed a one-off establishment fee (of up to 20% of the loan amount) and default fees or charges that are a maximum of 200% of the loan amount.
These strict regulations surrounding payday lending came into effect back in 2010, to counteract lenders taking advantage of financially-vulnerable borrowers. Along with these borrowing limits, payday lenders are legally required to conduct reviews of applicants’ bank statements dating back 90 days before approving a loan. While they do not have to conduct a credit check, these reviews are required to ensure the applicant has a regular income to suffice repayments.
Payday loans can provide instant financial help when people need it most. While they generally come with super high fees, they are still a really popular option for many Australians. Not only do payday lenders tend not to conduct credit checks on applicants, they also don’t need to secure loans with an asset. Aussies who struggle with bad credit will typically find their payday applications are approved, as they don’t need to provide their credit score when applying.
This loose lending criteria means payday lenders can deposit the funds into an applicant’s account within minutes, therefore offering ‘instant’ help and appealing greatly to time-sensitive customers.
The most common reasons for taking out payday loans are debt consolidation, getting through a period of redundancy, going on holiday, and having a bad credit history, therefore preventing you from taking advantage of traditional finance. Payday loans can be used for many of the same reasons as personal loans are, although they attract much higher fees and can be unaffordable for many in the long run.
At the end of the day, applying for finance is not a path to travel down unless it’s necessary. While applying for personal finance may not necessarily impact your credit score, applying for multiple loans within a short period of time (especially payday loans) can be harmful.
One way in which payday loans can harm your credit score is by missing repayment due dates. The super high fees that are charged on top of repayments can make it difficult for applicants to remain on track with paying off their loan, and the lack of knowledge surrounding the dangers of payday loans can contribute to a cycle of debt. This negatively impacts customers’ credit scores, and can even lead to bankruptcy. While this is the worst-case scenario, falling into dangerous financial practices is a very real possibility when relying on fast finance.
Many payday lenders are willing to offer finance to those receiving government benefits. Unlike traditional lenders, many forms of Centrelink benefits are viewed as a regular source of income; depending on which payday lender you apply with, they may be willing to offer financial assistance if your Centrelink benefits meet the requirements for repayments.
While it will depend on the lender and borrowed amount, people who receive government benefits are still eligible to receive financial help when they need it.
The reason that payday loans are so popular is because the majority of payday lenders offer financial assistance to bad credit customers. While there are exceptions to this, many customers who rely on payday loans do so because they are rejected by traditional lenders. Having a poor credit score makes someone ‘risky’ to lenders, as there is a higher possibility that they won’t make repayments on their loan. As such, these loans incur much higher rates, to provide the lender with some security.
Again, being eligible for a payday loan depends on which lender you’re applying with. Some may approve loans to those not currently working, although it can be risky for both parties. This is because most people need a regular source of income to be able to make repayments in the first place, so taking out a payday loan without having a stable income can lead to missed repayments and eventually a detrimental cycle of debt.
Within a five-year period, approximately 15% of people who take out payday loans will find themselves in a debt cycle, due to the unaffordable fees and short repayment times. While the offering of instant cash is undoubtedly appealing, it’s important to remember all that comes with it. There are other ways to get financial help apart from payday loans, even for those who struggle with bad credit.
If you’re struggling to pay off your payday loan, it’s important to reach out and seek help before you’re in over your head. You can contact the National Debt Helpline to discuss your options, or seek free legal advice if you’re uncertain about the terms within your loan agreement.
If you’re looking for financial assistance, Pocket Cash is a great place to start. We’ll take the guesswork out of searching for a fast personal loan, by finding you a lender who has your best interests at heart. Every Australian has a different financial journey, which is why we love helping people find the right help for them. If you’re interested in our services, chat to our team today.