What to consider when evaluating a payday loan?

By Louise Chan

December 28 2019
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Payday loans are easy-to-access short-term loans that even people with bad credit scores may get approved for – but this convenience comes at a high cost.

What to consider when evaluating a payday loan?

Before applying for one, you need to consider if you can afford the repayments given your financial circumstances and whether there are better options available.

Are payday loans bad for your credit?

When it comes to your credit score, a payday loan is just like any consumer debt – it’s harmless if you pay your balance on time, but it’s damaging if you miss repayments or default on the loan.

Can I get a payday loan with bad credit?
You may get approved for a payday loan despite a bad credit score – some lenders offer their loans specifically for this market.

However, getting a payday loan isn’t advisable because this may make your financial circumstances worse in the long run, especially if your income isn’t stable enough to consistently meet repayments.

When should you get a payday loan?

Payday loans have high fees and interest rates despite the government-enforced caps. If you’re experiencing financial constraints before the loan, you may end up financially distressed when you apply for one.

However, you may get a loan if the terms are fair and you can afford to pay it back in full and on time. Just make sure that the loan you’re applying for exhibits the following:

Lender is licensed and easy to contact
The government requires entities that deal with debt products to secure a licence, so make sure that the lender is licensed to offer a payday loan. Likewise, they should be easy to contact should you need to complain or request a change in your loan terms.
Information materials (i.e. website, brochures) provide clear information
Many Aussies have become financially distressed due to shady lenders who hide crucial information about the payday loan they offer. Some have even ended up having to pay three to four times the loan amount.

Make sure all the information you need to make an informed decision are stated clearly and the lender is willing to answer any question you may have about the loan.
Loan terms and amount are appropriate to your circumstances
The law requires lenders to ensure that borrowers are only approved for loans that are appropriate to their financial circumstances. Make sure that the terms of the loan are proportional to the amount you’re borrowing.
Loan transfer has an acceptable turnaround time
Payday loans usually have a quick turnaround, but it still pays to make sure that you’ll get the money you borrowed when you need it.

How do I pay back a payday loan?

Payday loans are paid through direct debit from the transaction account you provide the lender. This process is automatic, so you only need to ensure that you have enough money in your account.

If your financial circumstances change for the better and you want to make extra repayments, you may contact the lender to arrange the new debit amount – provided that this is allowed.

Likewise, you need to contact the lender if you have difficulty with repayments so that you can agree on a lower repayment amount. But if the lender refuses or you can’t agree on a lower amount, consider seeking advice from your state or territory’s external dispute resolution.

Payday loans v other forms of debt

If you really need to borrow money, consider other forms of debt first before applying for a payday loan.

Payday loan v other loans
There are a variety of other loans you may choose from depending on your needs.

You may be better off with a personal loan for specific or multi-use if your credit score is satisfactory because these usually offer lower rates compared with payday loans.

Payday loans v credit card
Both payday loans and credit cards are forms of high-interest debt. The main difference is that payday loans are one-time debt while credit cards offer a line of credit that you may use repeatedly.

Payday loan interest rates can put you at a greater financial disadvantage compared with credit card interest rates, but both can put you in deep financial stress if you’re unable to make repayments.

Payday loans v cash advance
A cash advance is a cash loan you get by withdrawing money from an ATM using your credit card and the amount you withdraw typically attracts a cash advance fee and higher interest rate.

Cash advances usually have a lower credit limit compared with payday loans, but the repayment term isn’t as strict as payday loans. That is, you’re required to start paying as soon as your next payday with payday loans, but cash advances may allow you to carry the debt longer even with minimum repayments.

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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