fbpx
  1. Insights
  2.  → Are Payday loans the best option out there?

Are Payday loans the best option out there?

Aug 13, 2021 | Insights

Summary

Pay day loans, also known as cash loans or short-term loans, are usually loans for small amounts paid off over a short period of time. These loans should not be used as long-term financial solutions.

What to look out for?

  • High fees.
  • Potential debt trap; it’s easy to fall into the habit of relying on Pay Day loans.
  • Can impact your credit score.
  • Can impact your ability to get other loans; lenders may view the excessive use of Pay Day loans as a poor reflection on your ability to manage your finances.

Tips to help you increase your chances of getting a loan

  • To avoid falling into a potential debt trap, try to only ever use Pay Day loans for emergencies and only if you absolutely need them.
  • If you have found yourself in a situation where you have too many Pay Day loans, try to focus on making extra payments where possible to pay them off sooner and avoid reborrowing them.
  • When you are in a better position financially, try to put some money aside for situations where you may need money for an emergency in the future.

Read on:

Is a payday loan the best option available? Read on to learn more about it.

 

What are payday loans?

Payday loans are small cash loans, usually on amounts up to $2,000. You will generally have anywhere between sixteen (16) days and one (1) year to pay the payday loan back.

A payday loan can be a very tempting idea if you need a quick cash flow injection ahead of your next pay cheque. The general idea is that you can borrow what you need now and you just pay the lender back on your next payday. It can seem like an easy win but these loans can tend to have higher interest rates and come with a swag of fees.

What’s more, you can end up ‘kicking the can down the road’ so to speak and end up needing another loan as your next payday approaches. You also risk failing to pay off the loan, which could leave you dealing with those higher interest fees. In saying that there are a few benefits in getting a Payday loan.

 

Advantages of payday loans

Quick Fix:
Once you have your loan application approved, you could have the funds in your bank account within a few hours. This is favourable in the case where you need an emergency cash flow for paying your bills, groceries etc.

Affordability check:
The lenders follow strict rules set by Australian Securities Commissions (ASIC) to ensure you are eligible and can afford to pay off the loan. In a nutshell, you will need to have enough funds to cover your living expenses including bills, rent, groceries and still have sufficient funds to pay off your loan monthly.

Despite its eye-catching exterior, a payday loan can come with its own set of downfalls.

 

Disadvantages of payday loans

High-cost repayments:

Most payday loans lenders can charge an establishment fee of 20% on the borrowed amount and a monthly fee of 4% on the amount borrowed.

According to https://moneysmart.gov.au, a payday loan of $2,000 over a one (1) year term can cost you around $3,360 to fully pay off. That means that the $2,000 you borrowed has cost you an extra $1,360. This begs the questions, is it really worth it?

Debt Trap:
In case you are short on making your payday loan repayments, you may be tempted to take out another payday loan to keep up with your outstanding repayments. This could easily put you in a spiral of a debt trap with multiple payday loans.

Effect your credit rating:

Every loan including your payday loan will be reflected in your credit file. Having multiple payday loans and loan enquiries can have a negative effect on your credit score. This may potentially mean you will pay higher interest rates if you consider applying for a loan in the future.

If this is something you want to steer clear of, here are a few alternatives you could consider.

Negotiate with your utility provider:

If you are having trouble paying off your bills, reach out to your utility provider and explain to them your situation. Most utility providers can offer an alternative payment plan. You could pay off your bills in smaller instalments and get on track with your repayments.

No Interest Loan Schemes:

No Interest Loan Schemes (NILS) can offer affordable and fair credit options for those with low income. If you need a loan for an essential household good like a fridge or washing machine, or an essential service, you can explore your options and learn about the eligibility criteria onhttps://ndh.org.au/Debt-solutions/No-Interest-Loan-Schemes-NILS/.

Centrelink advance payment:

You could apply to receive Centrelink benefits, if you are an Australian citizen and meet the eligibility criteria. You can learn more about the details to apply for advance payments here https://www.servicesaustralia.gov.au/individuals/topics/advance-payment/30201.

In case you are looking for an alternative option to a payday loan with a higher loan amount, longer repayment terms and a lower interest rate, you could consider applying for a Personal Loan – even with a bad credit history.

 

What is a Personal Loan?

Personal Loans usually allow you to borrow from $5,000 onwards to $100,000. The amount that you are eligible to apply for may vary based on the lender. You could apply for a loan to cover your personal expenses such as repairing or buying a vehicle, house renovations, holidays, and lots more.

  • Personal Loan repayment terms can range from 2 – 7 years and may vary based on the lender and your borrowing amount.
  • As opposed to payday loans, Personal Loans charge monthly interest rates to ensure transparency in your monthly repayments with no additional hidden costs.
  • If you plan to stay on top of your finances, you could pay off your loan earlier. Some lenders may not even charge an early pay out fee.
  • Repaying your Personal Loan can help you build your credit score, as regular repayments may help you build a stronger financial profile.
Where to apply for Personal Loans with bad credit?

A Personal Loan can be a much more suitable alternative to payday loans as you will most likely be paying a lower interest rate and should be restricted against continuing to ‘dip into’ the amount you have borrowed.

You can learn more about Personal Loans with bad credit from Finance One here.

If you’re trying to decide between a payday loan and a Personal Loan but you’re worried about having bad credit, talk to a friendly Customer Service Agent at Finance One today.

 

 

Finance One Commercial is a non-bank lender that provides opportunities for Australian small business owners to access business equipment finance. Get in touch to find out more.

Disclaimer: The information above is of a general nature only and does not consider your personal objectives, financial situation or particular needs. You should consider seeking independent legal, financial, taxation or other advice to check how the information relates to your particular circumstances. We do not accept responsibility for any loss arising from the use of, or reliance on, the information.

Share this article

WRITTEN BY

WRITTEN BY

Makala Elliott

Makala is the Marketing Manager at Finance One. She has worked in the Finance and Lending industry for over 10 years, gathering a wealth of experience. She is passionate about helping Australians get back on track with their finances by passing on her knowledge.

Related articles

Insights

How To Get A Business Loan With Bad Credit

If you need finance for your organisation, but you’ve got a bad credit score, don’t stress! You may still be able get a business loan with bad credit, it might just be a little more difficult. We take you through nearly everything you will need...

Can I get a car loan on Centrelink?
Insights

Can I get a car loan whilst receiving Centrelink benefits?

Yes, you may be eligible to apply for a Car Loan when you are receiving a pension or regular Centrelink payments. Centrelink benefits come in many forms, and lenders may consider several of them in assessing your eligibility to apply for a Car...

Insights

Personal Loans vs Car Loans: Learn the Difference

Car loans and personal loans are considered two (2) popular consumer finance options in Australia. And if you have both options available to purchase a car, it can be tricky to know which one to use!  By understanding the difference between...