What is a payday loan?

By Louise Chan

November 27 2019
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You may easily access a payday loan if you’re strapped for cash until your next pay, but don’t apply for one until you understand the product better. Here’s what you need to know about payday loans.

Why would you need a payday loan?

People who take out payday loans are typically those who have immediate need of cash or are experiencing financial hardship.

They usually have a regular income, but it may not be enough to cover expenses in the short term so they take out a payday loan to tide them over until the next pay period.

Others may also get a loan to cover unexpected immediate expenses that their budget can’t cover.

How do payday loans work?

Payday loans are high-cost and high-interest short-term loans for amounts up to $2,000 with repayment terms ranging from 16 days to 12 months.

The small loan is referred to as “payday loan” because the amount that the lender approves is typically set against the borrower’s income. Likewise, repayments are usually made on the same day as the borrower’s payday.

How are payday loans guaranteed?
Lenders typically ask for proof of income, such as payslips, and the dates you receive money to know your financial circumstances. The law doesn’t allow them to approve a payday loan without evidence of your income.

Some documents lenders typically ask for on top of the application are:

Payslips or Centrelink statements
Copies of statements of accounts, credit contracts or bills
Property rental statements

What are the advantages and disadvantages of a payday loan?

Advantages

Fast turnaround
Payday loans have a fast turnaround. Some lenders approve applications and release money within a few hours of receiving an eligible application, while others take one to three days.
Convenient
Many online lenders offer payday loans, so it’s easy to search for one that is appropriate for your circumstances.

Likewise, lenders usually have agreements with financial institutions so debt repayments may be automated.

Disadvantages

Costly
Despite the convenience payday loans offer, they’re still one of the most expensive loans you can take out because of all the fees and charges.
People with bad credit are vulnerable
Lenders approve payday loans even for people with bad credit, which means financially challenged people are vulnerable and may fall deeper into debt.

How do people secure a payday loan?

Securing a payday loan is easier than conventional loans because there are many institutional and alternative lenders that offer them – a simple search online would generate many potential lenders.

Once you have chosen a specific payday loan, you simply need to ensure that you meet the lender’s eligibility criteria.

Fill out an application form and submit all the required documents and information.

After this, you only need to wait for the lender’s approval within their promised duration – some lenders take one to three days, while others send the money within a few hours of application.

Once your payday rolls in, make sure you have money for repayments in the account you provided the lender.

What things to consider with a payday loan?

Payday loans can be expensive not only from the high interest rates but because of all the costs involved to get one. If you plan to apply for one, consider the following fees you may be charged:

One-time establishment fee
The government limit is at 20 per cent of the total borrowed amount
Monthly fee
Maximum is 4 per cent of the loan amount
Interest rate
Up to 48 per cent per annum
Default charges
Up to 200 per cent of the loan amount, including repayments plus default fees
Enforcement expenses
This is only charged if you fail to pay off the loan and the lender takes you to court

The government has placed a cap on fees that lenders may charge for a payday loan, but the combined fees above still make them one of the most costly debt products.

About the author

Louise Chan

Louise is a content producer for Momentum Media’s nestegg who likes keeping up-to-date with all the ways people can work towards financial stability in 2019. She also enjoys turning complex information into easy-to-digest, practical tips to help those who want to achieve financial independence.

About the author

Louise Chan

Louise is a content producer for Momentum Media’s nestegg who likes keeping up-to-date with all the ways people can work towards financial stability in 2019. She also enjoys turning complex information into easy-to-digest, practical tips to help those who want to achieve financial independence.

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