What are payday loans?

What are payday loans?

Payday loans, also known as cash loans, small loans, micro loans and short-term loans, are sometimes used as a short-term solution for cash-strapped individuals. They are amounts of up to $2000, with loan terms of up to a year, and have historically attracted very high fees. They have incurred the wrath of both government and lending watchdogs for the extraordinary amounts consumers have been known to repay. Sometimes it’s up to a few hundred per cent of the original borrowing amount. As such, they should be viewed as loans of last resort.

Why do people take out payday loans?

  • Financial emergencies, such as short term shortfalls;
  • Payday loans often have a very quick approval time;
  • They are often directly paid into the borrower’s back account.

What is the problem with payday loans?

According to an Australian Securities and Investments Commission investigation, “consumers of payday loans were charged costs that, given their financial position, put them at risk of an ongoing cycle of disadvantage that reduced the potential for financial and social inclusion”.

The charges associated with payday loans are often extraordinary. In one instance, reported by ASIC, a consumer was charged more than 800 per cent interest on a washing machine, which meant they spent more than $3000 on a product worth little over $300.

Has anything changed to make payday loans safer?

In the last couple of years, an increasing number of provisions have been introduced to try to protect consumers from predatory lending practices, such as restrictions on very short loan terms, restrictions of multiple loans in a 90-day period and the addition of new warnings and disclosures. Lenders can now charge a maximum of 20 per cent as an establishment fee and 4 per cent a month on the loan amount. However, that is still significant and the onus is on the consumer to be prudent about the suitability and dangers associated with payday lending.

Below are a couple of examples of how much a shorter and a slightly longer term payday loan could cost:

Example

Bob had several overdue bills and didn’t get paid for another three weeks. He had received repeated warnings and opted to get a payday loan after the water company threatened to disconnect him. He took out a $400 loan with a 30-day term. He was charged 20 per cent upfront – or $80 – and $16 in monthly interest at 4 per cent a month. He had to make three payments of $165.33. In total, he had to pay back $496 – $96 more than he borrowed.

Example

Wendy had to move house and needed $2000 to cover her moving costs. She opted to take out a payday loan for the aforementioned amount and decided to pay it back over a year. She was charged the maximum fees her payday lender was able to charge. That meant her establishment fee was $400 at 20 per cent and her monthly fees were $960 over the course of the year at 4 per cent per month. Each fortnight, she would have to pay back $129.23 and in total she would have to pay back $3360.

Alternatives to payday loans 

Given the high interest rates and fees associated with payday loans, prudent borrowers should explore alternatives before going down the path of cash loans. Here are some other options that are sometimes explored before cash loans:

  • Centrelink advance – Centrelink recipients should investigate the possibility of a payment advance if they are having trouble paying bills or other expenses. Sometimes there are intermediary services on offer.
  • Low interest rate credit card – While credit cards still charge interest, there are cards that offer significantly lower rates than payday loans.
  • Personal loans – Some personal loans cater to borrowers with one off expenses at a lower rate of interest than they would get for a payday loan.
  • Ask for an extension – some providers offer extensions for people who are having financial difficulties. Before seeking a loan of last resort, it’s worth inquiring about whether there are other options for people who are unable to pay their bills or for an immediate repair.

Where to get help?

If you are having financial difficulties, there are always places to turn for help. As a starting point, call the National Debt Helpline on 1800 007 007, which is open Monday to Friday between 9.30am and 4.30pm and is free. More support is available here

WARNING: IS A CASH LOAN RIGHT FOR YOU?

Cash loans, also known as short term or payday loans, should only be used when absolutely necessary and NEVER used for long-term borrowing. They are designed to fill once-off gaps in your cash flow and need to be repaid in full the next time you get paid. If you are not able to repay the loan in full with you next pay, the loan will become very expensive. Always look to more traditional options such as savings, credit cards, overdrafts or family first, and only use a cash loan as a last resort. If you have ongoing financial problems please consult a financial counsellor to help with a long term solution.

Call the National Debt Hotline: 1800 007 007  

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Learn more about personal loans

Can I get a no credit check personal loan?

Personal loans with no credit checks are available and called ‘payday loans’. These are sometimes used as short-term solutions for cash-strapped Australians. They often carry higher interest rates and fees than regular personal loans, and individuals risk putting themselves into a worsened cycle of debt.

What interest rates are charged for personal loans?

Lenders aren’t allowed to charge interest on loans of $2,000 and under. Instead, they make their money by charging a one-off establishment fee of up to 20 per cent and a monthly account-keeping fee of up to four per cent. Lenders might also ask you to pay a government fee.

For loans between $2,001 and $5,000, lenders can make their money in only two ways: a one-off fee of $400 and annual interest rates of up to 48 per cent.

For loans of $5,001 and above, or for loans that have terms longer than two years, lenders can charge annual interest rates of up to 48 per cent.

Those fee caps don’t apply to loans offered by authorised deposit-taking institutions such as banks, building societies or credit unions, although such institutions are highly unlikely to charge interest rates of anywhere near 48 per cent.

Can I get a fast loan with bad credit?

Some lenders offer fast loans to borrowers with bad credit. Providers of small payday loans of up to $2000 or medium amount loans of up to $5000 may have no credit checks, though these lenders will usually want to confirm you can afford its loans on your income.

How long are $3000 loans?

Medium amount loans can be repaid between 16 days and 2 years. Many personal loans have terms between 1 year and 5 years, though some are as short as 6 months while others last for 10 years.

Generally, the shorter a loan’s term, the more expensive your regular repayments may be, but the less total interest you’ll pay. Loans with longer terms mean more affordable repayments, but more interest charges over the full term.

What can quick loans be used for?

Many borrowers use quick loans to cover short-term or urgent costs, such as paying for car repairs, medical bills, or replacing broken appliances or electronics. Quick loans often have high interest rates compared with regular personal loans.

Before applying for a quick loan, consider your other available options, such as working out a payment plan or applying for an advance or extension. 

Are there $2000 emergency loans?

If you’re having trouble being approved for a loan of less than $2000 and urgently need to purchase household essentials, there may be emergency loan options available to you.

For example, the No Interest Loans Scheme (NILS) allows low-income borrowers to take out interest-free loans of up to $1500 for essential goods and services.

For further assistance, consider contacting a financial counsellor, or calling the National Debt Helpline on 1300 007 007

Do student personal loans require security?

While some personal loans can be secured by the value of an asset, such as a car or equity in a property, student personal loans are often unsecured, which typically have higher interest rates.

Some lenders also offer guarantor personal loans to students. These loans have lower interest rates, as a guarantor (usually a relative of the borrower with good credit) will fully or partially guarantee the loan, taking on the financial responsibility if the borrower defaults.

Which lenders offer bad credit personal loans?

Several dozen lenders offer bad credit personal loans in Australia. These are generally smaller lenders that aren’t household names.

How do I consolidate my debt if I have bad credit?

The worse your credit history, the harder you will find it to consolidate your debts, because lenders will be less willing to lend you money and will charge you higher interest rates.

However, people with bad credit histories can make debt consolidation work by following this three-step process:

  1. First, find a lender willing to give you a bad credit personal loan. This process will be simplified if you go through a finance broker or use a comparison website like RateCity.
  2. Second, make sure the interest repayments on your new loan are less than the repayments on the loans being replaced.
  3. Third, instead of spending those savings, use them to pay off the new loan.

Can I get guaranteed approval for a bad credit personal loan?

Few, if any, lenders would be willing to give guaranteed approval for a bad credit personal loan. Borrowers with bad credit histories can have more complicated financial circumstances than other borrowers, so lenders will want time to study your application. 

It’s all about risk. When someone applies for a personal loan, the lender evaluates how likely that borrower would be to repay the money. Lenders are more willing to give personal loans to borrowers with good credit than bad credit because there’s a higher likelihood that the personal loan will be repaid. 

So a borrower with good credit is more likely to have a loan approved and to be approved faster, while a borrower with bad credit is less likely to have a loan approved and, if they are approved, may be approved slower.

How do I find out my credit rating/score?

You're entitled to one free credit report per year from credit reporting bodies like Equifax, Dun & Bradstreet, Experian and the Tasmanian Collection Service. You can also get a free report if you’ve been refused credit in the past 90 days.

Credit reporting bodies have up to 10 days to provide reports. If you want to access your report sooner, you’ll probably have to pay.

What is credit history?

Your credit history covers everything to do with applying for loans. It includes the number of loans you’ve applied for, the amounts you’ve borrowed and your record of meeting repayment schedules.

How do I know if I've got a bad credit history?

You can find out what your credit history looks like by accessing what's known as your credit rating or credit score. You're also able to check your credit report for free once per year.

What causes bad credit history?

Bad credit history is caused by filing for bankruptcy, defaulting on your debts, falling behind on your repayments and having loan applications rejected. Lenders are wary of borrowers who demonstrate this sort of behaviour because it suggests they might struggle to repay future loans.

Borrowers with bad credit may find it more difficult to be approved for a loan, or they may get higher interest rates when they do get approved.