Payday Loans Explained

What is a Payday Loan?

Payday loans are unsecured loans ranging from $100 to $2,000. Repayment terms range from two weeks to one year after the loan was issued. Payday loans usually cost borrowers an upfront fee of up to 20% of the loaned amount, plus the monthly interest rate of 4%.

How Do Payday Loans Work?

Payday loans are useful for people with sudden unexpected expenses, bills and poor cash flow resulting in financial difficulty. Someone such as a single parent who has to pay for a sudden unexpected cost may find a payday loan to their advantage to help cover costs.

To qualify for a payday loan, a borrower should be a permanent resident of Australia, have a bank account, a regular source of income, and proof of identity.

What Are the Advantages of a Payday Loan?

The following are the cons of a Payday loan:

  • High late payment rates: Payday loan late payment and default costs are high. Check that your lender isn’t charging you more than ASIC permits, and find out what you’d be charged if you missed a payment or couldn’t repay the loan entirely.
  • Influence on credit score: A loan application may leave a hard enquiry on your credit report. While some lenders may not take credit history into account, asking for a large number of loans in a short period of time might have a negative influence on your credit score. A strong credit score is vital since it will help you receive better offers on financial items in the future.

What are the Dangers of Payday Loans?

The following are the cons of a Payday loan:

  • High late payment rates: Payday loan late payment and default costs are high. Check that your lender isn’t charging you more than ASIC permits, and find out what you’d be charged if you missed a payment or couldn’t repay the loan entirely.
  • Influence on credit score: A loan application may leave a hard enquiry on your credit report. While some lenders may not take credit history into account, asking for a large number of loans in a short period of time might have a negative influence on your credit score. A strong credit score is vital since it will help you receive better offers on financial items in the future.

How to Apply for Payday Loans?

Most lenders offer a 100% payday loan application process. The online application form is usually simple to complete, with most done within 5 minutes. You’ll need to provide contact, employment and residential information. Bank details and bank statements are also collected online through a secure and encrypted method by a third-party company such as Credfin.

Responsible lenders are required to assess your latest 90 days of bank statements to review income and outgoings. This is part of their effort to gauge your ability to repay a loan if approved.

In some cases, the lender may request supporting documents to finalise your application. The lender will reach out to you directly if this is required.

After your loan is processed and approved, loan proceeds will be transferred to your preferred bank account.

Where Should I Apply for Payday Loans?

Most companies offering payday loans have a website where you can complete your application. Applying directly to a lender can be frustrating if you are denied a loan, as you’ll need to submit the application data again on the next lender form. Using a service like ours makes finding an eligible lender really easy. Through one application, you can access an entire network of lenders and be matched with an eligible provider within a few minutes.

However you search for a loan, always check that the lender has a credit licence on the ASIC Register and that the lender is readily contactable.

Who is Eligible to Apply for Payday Loans?

There are some basic criteria you’ll need to meet to apply for a payday loan. You’ll need to:

  • Be an Australian citizen or a permanent resident
  • At least 18 years of age
  • Employed for a minimum of 3 months.

Final approval will depend on the lender’s lending criteria and the affordability assessment for the borrower. Personal details, as well as financial details, will need to be supplied in order to demonstrate that you meet the eligibility requirements.

Is It Possible to Acquire a Payday Loan Without Having a Bank Account?

No. It is not possible to acquire a payday loan without having a bank account.

What are the Limits in Payday Loans?

Payday lenders are regulated to only lend amounts from $100 to $2,000. The amount you can borrow will depend on your personal circumstances and the lender’s assessment of your applicant. These short-term loans mean the loan repayment tends to range from 16 days to 1 year.

What are the Repaying Options of Payday Loans?

There is only one repayment option typically with payday loans: lump-sum repayment. Some lenders will provide an extension to the expiration of the payment subject to additional fees and higher interests. Repayment options range from two weeks to one year depending on the lending institution. Loan repayments are automatically taken by the lender by setting up an auto-debit arrangement with your bank account.

What are the Interest Rates of Payday Loans?

Most lenders impose initial fees on payday loans of 20% of the loan amount and a monthly interest fee of 4% of the loan amount. This translates to an Annual Percentage Rate (APR) of 48% per annum for other personal loan types with more than one year of payment. For a $2,000 loan, the establishment fee is $400 and the monthly interest is $80.

What Happens When You can't Repay a Payday Loan?

If you do not make repayments on time by the due date, you will normally be charged default penalties, which will be added to your debt. The number of default costs that could be incurred can be double the amount borrowed. If you’re about to default on a payday loan, call your lender to explain your position and try to work out a new repayment schedule plan.

You may be able to work out a payment plan to avoid having your debt sent to collectors and having to appear in court. Repayment amounts will be different for each borrower based on the loan agreements.

Do Payday Loans Affect Your Credit Score?

While this isn’t exclusive to payday loans, paying your bills on time might help improve your credit score. Making your payments on schedule and within the agreed-upon period demonstrate good credit behaviour. However, If you apply for multiple payday loans in a short period of time, your credit score may suffer.

Furthermore, every time a lender does a hard credit check, you may notice a slight drop in your credit score. This is why submitting many credit applications in a short period of time might harm your credit score. A payday loan might also potentially harm your credit score if you do not make timely payments or default on the loan. It is also easy to enter into a debt cycle while using payday loans resulting in a poor credit history.

How Long do Payday Loans Stay on your Credit Report?

Payday loan defaults typically stay on your file for up to 7 years. Your service provider may notify a credit reporting agency about your failure to make a repayment,  resulting in a bad credit rating. If you pay the debt, the default will still be present on your credit report, but it will also indicate that you paid it.

What are the Alternatives to Payday Loans?

There is a range of loans available for people looking for an alternative to payday loans. The following are the alternatives to payday loans:

  • Obtain a No-Interest Loan: The No Interest Loan Scheme (NILS) gives low-income people and families access to secure, fair, and affordable financing for household products, medical, and dental care. Call 136457 or visit www.nils.com.au for more information.
  • Bad-Credit Loans: Some online lenders specialise in loans for people with low credit scores. These lenders are willing to work with borrowers that have high debt-to-income ratios and offer debt consolidation loans.
  • Credit Union Loans: If you’re already a member of a credit union or eligible to join one, you already have one alternative to payday loans. Credit unions look at your credit score, but they also look at your relationship with the credit union and your income before approving a loan.
  • Emergency Relief: People in financial need may get urgent cash and/or material assistance from Emergency Relief agencies. Emergency relief services are provided by community organisations to assist individuals in meeting their urgent basic requirements during times of financial hardship. Although access to Emergency Relief is free, certain service providers may have specific requirements that must be completed in order to use their specific Emergency Relief program. The Department of Social Services (DSS) Service Directory lists your local Emergency Relief provider.
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