Are payday lenders a good or bad idea?

What are payday lenders?

Payday LendersPayday lenders are lenders who offer ‘payday advances’ or ‘payday loans’ which are usually short-term loans at higher interest rates. They are usually advertised as a way to access money fast or save you from overdue or unexpected bills.

So this seems like a great idea, having access to quick cash when you need it for life’s unexpected bills, but is using a payday lender a good idea?

Advantages of using a payday lender

It is a great solace to know that you can get access to cash quickly, in some cases in as little as an hour when life throws you a curve ball.

Most payday lenders offer you the option to apply online, meaning that you can make an application for a loan fast, whenever and wherever. You can make an online application in the middle of the night if need be and in some cases receive an online decision straight away.

Possibly the most valuable advantage of using a payday lender is that the money is usually available straight away, meaning that if you need money fast, if approved, you have access to money straight away.

Disadvantages of using a payday lender

Although the advantages listed above make using a payday lender seem like a pretty good idea, there are some very prominent downsides to using a payday lender for cash advances as well.

High interest rates

Possibly the biggest disadvantage to using a payday lender is that the interest rates are astronomically high. Because the amount borrowed usually under $2,000, and the term of the loan is relatively short, the only way the lender can make money in the form of interest is to set a very high interest rate. You can be looking at an annual interest rate of up to 50% in some cases.

High fees

Apart from astronomically high interest rates, payday lenders tend to also charge a hefty amount in fees. In addition, there are usually high penalty rates charged if you happen to miss a payment.

Effects your Credit Rating

Finally, another side effect of using payday lenders that not many people realise is that it effects your ability to be able to secure mainstream finance through prime lenders such as banks.

Payday lenders like mainstream lenders access your credit file to help determine you suitability for finance. However it makes many banks and mainstream lenders uneasy seeing enquiries on your credit file from payday lenders. In certain circumstances, they won’t even consider applications for other types of finance if they see payday lender activity on a person’s credit file.

Lenders tend to take the stance that if you need to utilise payday lenders, you are showing that you can’t effectively manage your money and don’t have a suitable budget. It also casts doubt on whether you have the capacity to repay another loan.

How can I pay my bills without using payday lenders?

Firstly, you need to work out a budget including ALL your current liabilities and bills. It helps to break them down into weekly, monthly and yearly bills to make sure you’ve listed them all. There are many free tools available on the internet to help you create your very own budget including MoneySmart’s Budget Planner, which is available at www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/budget-planner.

If you’re short on cash, you may be able to consider waiting before making big purchase decisions to help you save and continue paying your bills at the same time. You can also consider using layby services if available. Alternatively, if you are having trouble paying your current loans, credit card payments or finance commitments on time, you do have the option of speaking directly to the lenders who have provided you with finance to request an extension on payments. Each lender is required by law to have provisions in place to deal with hardship. Taking action immediately in this situation is vitally important to make sure you can get on top of your debts sooner and stop it from becoming a big problem.

For further information on managing debt and help with paying finance debts, visit the MoneySmart website at www.moneysmart.gov.au/managing-your-money/managing-debts/trouble-with-debt.

 

Tags: Payday Lenders, Payday Advances, Payday Loans,

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