People are drawn to these loans for a variety of reasons (or any type of loan). Payday loans are more alluring than other types of loans for a number of reasons.
While it is possible to borrow $2,000 in an hour from some specialised lenders, there are likely to be several conditions tied to the money, most notably the astronomical fees that many borrowers are unaware of.
These loans, including cigno, are frequently referred to as "payday loans," while they can also be called "quick loans," "cash loans," or "small amount loans."
Many of these loan providers like to portray themselves as carefree lenders that will offer you some delicious magic cash when you need it most.
You may have heard commercials like these: "Have insufficient funds to buy groceries? Can't afford to pay the rent this week? You recently got a bill for electricity but don't have the money to pay it. Pfffft. Apply for a quick loan, then continue!"
Would you like to speak to a specialist? Book a complimentary discovery session by calling: (03)999 81940 or emailing team@klearpicture.com.au.
Now, you don't have to be an expert in finance to understand that getting a loan to cover expenses like food or power bills is bad for your budget. In fact, a small loan provider in Australia was recently compelled to take one of its TV advertisements off the air because it implied consumers might get a quick loan to cover their power expenses.
Payday lenders take advantage of the weak and keep them in debt. According to consumer protection groups, the total value of payday loans in Australia is expected to hit $1.7 billion by the end of the year, according to recent figures.
Over the past three years, more than 4.7 million payday loans totalling $3 billion have been made, earning lenders a nett profit of almost $550 million.
According to research from the Stop the Debt Trap Alliance, a debt spiral has affected 15% of payday loan borrowers over the past five years.
The partnership, which is made up of consumer advocacy organisations and nonprofits, including the Salvation Army and Good Shepherd Microfinance, urges the federal government to enact tougher regulations to safeguard consumers against "predatory" payday lenders.
Gerard Brody, CEO of Consumer Action and a spokesperson for the coalition, claimed that payday lenders exploited vulnerable Australians.
The latest research indicates that more Australian households run the risk of getting into a debt spiral, which is "the harm caused by payday loans is very real," according to Brody.
Payday lenders cater to low-income persons in need of immediate cash by offering short-term, high-interest loans (up to 400%).
The poll discovered that the amount of women utilising payday loans climbed from 177,000 in 2016 to 287,000 in 2017. This represents a significant increase from the previous year. More than 41 percent of these mothers were their children's only source of financial support.
This comes as a result of research that was conducted in 2018 that found more than one in five households in Australia relied on payday loans in order to pay for their day-to-day needs.
The alliance implores Congress to enact the Small Amount Credit Contract (SACC) review's recommendations.
These suggestions include capping the total amount of consumer leasing payments and limiting loan repayments to 10% of an individual's income.
What is a payday loan?
Payday loans let you borrow small sums of money that must be paid back within a time frame of 16 days to 12 months (often up to $2,000 however, some payday lenders permit up to $5,000).
Repayments are frequently paid on a schedule that matches your income (for example, every two weeks), either by direct debit from your bank account or a deduction from your paycheck.
The cost of payday loans
Payday loan lenders with licences are allowed to charge high fees but no interest. As a result, you will be required to repay much more than you borrowed.
The majority of payday lenders impose an establishment cost of 20% of the borrowed amount and a monthly fee of 4% of the borrowed amount. There will be an initial cost of $400 and a monthly fee of $80 for a $2,000 loan.
Even if payday loans have extremely high-interest rates, there is always a need from borrowers. However, because of the exorbitant interest rates, the governing bodies have outlawed payday loans in the majority of nations.
This information highlights the benefits of Australia being the top country for payday loans. Let's look at why most Australians who have had payday loans seem to be happy now.
Reasons why Australia stands out in the payday loan market
There are no interest rates
Payday lenders in Australia have been instructed not to impose any interest fees on the borrowers. Payday loan providers should instead impose a one-time cost of 20% and a monthly fee of 4%.
Charges that payday lenders charge the borrowers
Additionally, according to the Australian Securities and Investment Commission (ASIC), payday lenders may only impose the following fees on borrowers.
- A tax, however, the majority of lenders don't impose that
- If the borrower makes a late payment, the lender must impose late fees.
- The lender has the right to impose collection fees in the event of failure.
However, in other nations, payday lenders are permitted to charge their clients interest rates of up to 400%. And given that you will repay in at least two weeks, that is a pretty hefty expense.
However, foreign lenders impose exorbitant interest rates, in contrast to Australian payday lenders. So the lender will treble the interest rates if you make late payments on the loan. And a debt cycle follows as a result of it.
As a result, managing a loan without interest rates is simpler than managing one with high-interest rates.
There is strict regulation in Australia
No lender may conceal their identity while providing loans to Australians without first going through ASIC. And that's a fair indication of how much the Australian government values its people.
The number of borrowers for payday loan lenders has expanded as a result of their transition from analogue to internet lending over time.
Due to the high interest rates associated with payday loans, the Australian government has to take action to mediate between lenders and borrowers. And it developed regulations to control the expanding payday lending financial industry.
The no-interest law is the most significant piece of legislation that the Australian government passed. Lenders were encouraged by the government to only impose one-time fees.
All payday lending in Australia is governed by the National Consumer Credit Protection Act (NCCPA), which was passed in 2010. As a result, you shouldn't be concerned if you're an Australian since your government will make sure that you avoid falling into a debt trap. It's likely that you may be approved for a payday loan up to $2,000 and return it over time in smaller amounts.
Would you like to speak to a specialist? Book a complimentary discovery session by calling: (03)999 81940 or emailing team@klearpicture.com.au.
No credit checks
People are drowning in debt in the current economy, which has a negative impact on their credit scores. Additionally, before applying for a loan, banks and some other lending institutions demand that potential borrowers have strong or great credit scores.
In contrast, lenders who offer no credit check payday loans do not verify your credit before granting you a loan. The Australian lenders are average and don't impose interest rates, therefore they are not exceptional.
Therefore, not having enough money to cover your emergency needs is not due to having a negative credit score. You only need to demonstrate that you can afford to repay the loan and have a reliable source of income.
Frequently Asked Question About Payday Loans
Yes. Payday loans will show up on your credit report as they are a line of credit.
Payday loans are usually listed as a 'personal loan' in your credit report and will include information about the amount of money borrowed as well as any defaults (missed payments).
Why do most people take out payday loans?
For the most part, we found that Americans use payday loans for essential expenses rather than entertainment or paying back other debt. In addition, just 2.3% of payday loans are used to repay other loans, a practice that can leave borrowers with revolving debt that can be difficult to escape.
Every payday lender has its own rules about lending to people who are not currently employed or receive benefits. However, some payday lenders will lend to people on benefits. Check directly with the lender to find out what their eligibility rules are.
An alternative to taking out a payday loan is to apply for an advance payment of your benefit. Most people who receive Centrelink can apply for this, and there are no fees or interest charges.
This will depend on the lender you are applying to, but you can take out multiple payday loans at once.
However, you may find the screening process is more thorough the second time around because lenders are required by the Australian Securities and Investments Commission (ASIC) to put further checks and balances in place for those applying for multiple loans, as it's a sign they're under severe financial stress and may have trouble paying the money back.
It is strongly recommended that you reconsider taking out too many payday loans at once because doing so can quickly lead to your debt spiralling out of control.
Unfortunately, you can't remove any information on your credit report that is correct. But the good thing is that all applications for things like credit cards, payday loans, home loans, car loans etc., only stay on your credit report for five years.
In the meantime, avoid credit repair companies who say they can wipe payday loans off your credit report - they can't. They're also extremely unlikely to be able to repair your credit score, but they'll charge you through the roof for it anyway. Instead, work on building good money habits yourself (this is free!) or consider speaking with a free financial counsellor who can help you get back on track.
Paying back your payday loan
If you can't keep up with repayments, visit the National Debt Helpline website for help to repay your payday loans.
By law, licensed payday lenders must lend responsibly. This means they can't give you a loan if they think you won't be able to repay it or it could cause you substantial hardship.
How do payday loans work?
Once the lender has approved your payday loan application, the funds could be in your bank account in under an hour.
Then it's a matter of repaying the loan. Many payday lenders will allow customers to select their own loan term, but the repayments are generally scheduled to come out in line with when you receive your pay.
Many lenders will set up a direct debit from their bank account for that day and send SMS reminders (however, not all payday lenders do this).
Are payday loans bad for credit?
As with any form of debt, a payday loan is treated like any other liability during a home loan application. When assessing an application for a line of credit, lenders will look over the applicant's credit history to see what their financial habits are like and determine their risk as a borrower. Assessment criteria will vary between lenders, but many will consider several factors like the number of credit inquiries you've made (loan inquiries), credit limits, the number of active credit accounts you have, and any defaults. It's important to note that by now, pays later services are considered lines of credit.
How a bank will consider an applicant who has used a payday loan will depend on their credit history as a whole.
Savings.com.au asked the big four banks how they consider borrowers who have taken out a payday loan when applying for other lines of credit like a home loan.
An ANZ spokesperson told Savings.com.au they would consider a borrower who had taken out a payday loan as a risk but that "each applicant's particular circumstances will dictate to what extent".
It was a similar sentiment echoed by NAB and Westpac. A NAB spokesperson told Savings.com.au they "consider all lending applications on a case-by-case basis".
"Serviceability is assessed on several factors to ensure customers can make repayments both now and into the future," NAB said.
What if you can't afford to repay a payday loan?
If you think you won't make your next repayment, the first thing you should do is contact your lender and let them know. Some lenders have financial hardship departments who can help you out in moments like these and delay the next direct debit repayment. That way, your bank and the lender can't charge you for a failed payment.
After you've done that, it's best to take a look at your budget and set enough money aside to make sure you will have enough in your account to make the next repayment. But if you still don't think you'll be able to cover your repayments, you should get in touch with your lender again to discuss your options.
The worst thing you could do is to ignore the repayment or take out another payday loan, as both options will only leave you even further in debt.
Most Australian Payday lenders process your loan within a few hours. So, in case you have a very pressing emergency, you can always rely on them to get fast cash within a short while.
After proving that you can repay the loan, there is no other reason to hold them from giving you a loan. In addition, the lenders will allow you to choose a suitable payment plan that you can adhere to it. And most lenders will enable you to repay over one year.
Getting a payday loan in Australia is cheap and less risky. It's better to take a payday loan with a one-off fee than the one with high-interest rates. Remember, the interest rates double if you pay the loan late.