Payday loans

Published on November 18, 2015 8:26 am, by

What is it?

A payday loan is a short term loan, generally to be paid back the next month.

Payday lenders aren’t overly concerned with credit history, they’re interested in a person’s ability to pay the loan back in the agreed timeframe.  This opens payday lending up to people who have previously defaulted on credit contracts.

Payday lending is expensive.  Perusing the options in Australia, it is evident that it is common for payday lenders to charge an establishment fee that is equal to 20% of the amount being borrowed and then charge 4% interest on the funds.

What this translates to on a $1,000 loan over 1 month would be an establishment fee of $200, with interest of $40.  Repaying the loan would cost $1,240.

In Australia the payday loan market is worth roughly $400million per year.  The payday market causes concerns in that it contributes to the debt spiral some people are in.

Understanding why

Reasons for applying for payday loans vary, often they are used for emergencies, however at times they can become part of a person’s ordinary spending pattern.  Where it is a struggle to repay the money lent, consumers will borrow again to repay, keeping them in a debt cycle.   Nearly two thirds of payday lending customers are repeat customers taking out an average of 6 loans per year.

The annual cost of living has increased substantially over the last ten years.  Many low income families are in the position of being fully stretched each pay period with an unexpected expense leaving them with very few options.  Alternative options for some are to borrow from family or friends, or seek assistance from not-for-profit organisations.

Payday loans are attractive to borrowers as they are rarely declined and quick to have approved and dispersed.  The interest rate often annualises to over 250% which is huge for repeat customers who are on low incomes.  The danger is that another emergency comes up while there is still a struggle tor financially move forward from the previous one.

What to do if you are stuck

If you need assistance to purchase a good or service, see if you are eligible for NILS (No interest loan schemes).  NILS is a network of community based organisations that provide assistance to purchase essential goods and services.

For those who are in the position of being unable to repay debt they have taken out, ASIC can help by putting people in touch with financial counsellors and Lifeline is available for emotional support.

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Jen is an experienced banking professional who loves wine, coffee, finding a bargain and of course her three beautiful children. Since Jen's first budget led her to buy a home at 20, Jen has passionately helped others to make better decisions with their money.

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