Payday Loans

What are payday loans?

Payday loans provide a short term money solution for people struggling between receiving income from wages or Centrelink payments.Unfortunately these products come with very high fees and interest.You can end up paying back nearly double the amount you have borrowed and find yourself stuck in a debt cycle that is hard to climb out of.

There has been a recent increase in wage advance products. Once you take out a loan to access your wages early, at a cost, you will always be behind and find it very difficult to catch up. Just like buy now, pay later products, you are using your future income to pay for items now. You’re in debt before you even get paid and are likely to be spending more than you can afford.

Listen to our podcast Why Payday Lending May Not Be A Good Idea where financial counsellor Christine unpacks what payday loans are and the traps.

How do I recognise a payday loan?

Payday loans are not necessarily advertised under the name “Payday loan”. There are ways to identify these products, including:

• Online or in store advertising for “fast & easy cash solutions” “bad credit, we can help, “wage advance”, “instant access to your pay” – basically any product that seems to good and easy to be true is going to come at a cost
• A loan amount up to $2000
• Establishment fee of 20% of the loan
• A monthly fee of 4% of the amount loaned.

Example

Trent didn’t have enough money to pay for car repairs as his only income was Jobseeker. He went to a local second-hand store and took out a small loan of $1,500 to pay the mechanic.The people at the store were very friendly and even made him a coffee.He started paying back the loan each month, but never seemed to get ahead.When he sat down and worked out how much money he would need to pay back over 12 months, he was shocked to realise with the upfront fees and monthly interest he would end up paying back was $2,520.He was still struggling and didn’t know how to get out of this debt.

Tip – Trent could have applied for a no interest loan (NILs) to pay for his car repairs.He could also see if he could set up a payment arrangement with the mechanic.

What more affordable options are available?

• No Interest Loans – provide affordable repayment options for people on Centrelink income and you never pay interest.

• Centrelink advance – if you are receiving Centrelink payments, see if you can access and advance payment to cover unexpected expenses. Keep in mind that you will need to pay the money back, and your Centrelink payments will reduce during this time.

• Emergency relief assistance – some not for profit organisations provide emergency relief assistance. Search for your local providers.

How to manage an existing payday loan?

1. Work out what you can afford by doing a budget.Contact the loan provider and ask for hardship assistance – reduced repayments, lower interest and fees.
2. If the lender won’t provide an affordable payment arrangement, consider cancelling the direct debit through your bank and setting up a more affordable amount until you are able to come to a suitable arrangement.
3. Can you sell an item or do extra jobs to find the money to pay off the loan quickly?
4. If you cannot arrange a more affordable option with the lender, you can make a complaint with the Ombudsman, The Australian Financial Complaints Authority (AFCA).
5. If you can’t afford to pay anything, speak to a Financial Counsellor.