With the Covid-19 global pandemic has come ﬁnancial diﬃculties for many people. Unfortunately this has also led to a rise in payday loans, with the ABC recently voicing concerns over payday lenders actively targeting vulnerable people by offering short-term loans to get them through the coronavirus pandemic.
There has also been an increase in digital payday lenders popping up in response to the fact that people under 30 years of age are among the most ﬁnancially-strained. These new apps are ﬁlled with bright colours and market themselves as helping individuals to “manage their cash ﬂow” and empowering individuals to “take control” of their ﬁnances.
In this overview of payday loans we’ll take you through the fees and rates involved with payday loans and why they inhibit your ability to get a loan at a good rate (if at all).
What Is A Payday Loan?
A payday loan is a short-term, high cost loan that can provide you with the money you need to get by until your next pay day. They were originally designed to be a short-term solution for borrowing small amounts, however modern payday loans can allow you to borrow up to $10,000.
Popular selling points used by payday lenders are no credit checks, instant approval, deposits on weekends, and 100% online process.
A payday loan may seem like the only option in a ﬁnancial emergency if you have poor credit and no savings. But it can do a lot more harm than good – and there are deﬁnitely better and safer alternatives.
What Does A Payday Lender Get From Your Loan?
Lenders can’t charge interest on payday loans, but they can charge a lot in fees. You will always have to pay back a lot more than you borrowed.
Most payday lenders charge an establishment fee of 20% of the amount borrowed and a monthly service fee of 4% of the amount borrowed.
The equivalent interest rate changes depending on how long you take the loan but it is usually between 100% and 500% per annum. This is an extremely high interest rate that often leaves you in a ‘debt trap’ where you need to keep taking out high interest rate small loans to pay off the interest of your other loans.
Payday lenders can charge you multiple fees including an establishment fee, monthly service fee, government fee, dishonour or missed payment fee, default fees and enforcement expense.
Predatory Behavior That Is Common With Payday Loans
Short term and payday loans are notorious for engaging in predatory behaviour that targets vulnerable households; people with low to no income who are in desperate need of fast cash.
A recent report found that, while women only account for 23 percent of borrowers, the number of women using payday loans increased from 177,000 in 2016 to 287,000 in 2019. And 41 per cent of those are single mothers. This is exactly the demographic that predatory lenders approach and trap in debt.
Working people who have insecure employment and higher expenses are also targets for payday loans. Leaving you tipping over into relying on payday loans and making your ﬁnancial situation worse.
Predatory payday lenders will speak vaguely about interest rates, leading you to be under the impression that the payday lender is quite ﬂexible with repayments. This is not the case.
Adverse Effects Of A Payday Loan
Aside from the most obvious problem with payday loans which is the cost of repayment, people who take payday loans often get locked into an ongoing cycle.
The term “debt trap” is often used alongside payday loans as it’s a common outcome when you take out a short term, payday loan.
Payday lenders ask you to pay high amounts back over a short period, and those high amounts mean you don’t have enough in your budget for essential expenditure like housing and utilities. So you continue to pay the interest amounts leaving the original debt sitting unchanged.
Payday loans also leave a bad mark on your record should you try to get ﬁnancing through a bank. Banks dislike you taking out payday loans due to the assumption
that if you use payday lenders, you can’t afford to live week to week let alone paying a loan off to a bank.
What We Recommend Instead Of A Payday Loan
There are so many better alternatives to a payday loan, no matter your ﬁnancial situation or credit history.
Personal loans will allow you to borrow with rates that are typically much lower than a payday loan. While payday loans charge an average of around 400%, personal loans cost around 5.99% to 19% (depending on proﬁle).
How To Find The Best Financing For Your Situation
At Finance Ezi, our team understands how complicated loan applications are, so we make it our business to support you throughout the entire process so you get the best ﬁnancial solution possible.