The risks associated with payday loans

We’ve all seen the movies where the luckless protagonist borrows money from a remorseless loanshark and is warned that they’ll lose a finger for each day they’re overdue.

Fortunately, us Australians have much more civilized short-notice borrowing options, but that’s not to say there aren’t any risks associated with payday loans.

What’s a payday loan?

Put simply, a payday loan is money lent at short notice at a high rate of interest over a small period of time.

The name is basically derived from the understanding that the money will be paid back as soon as the borrower’s next pay cheque rolls around.

These days, however, the loan can be repaid over the course of one year (larger loans can be taken out over even longer periods, too).

Usually, payday loans are between $200 and $2000, and they tend to be paid back via direct debit on your pay day, or even a deduction from your pay itself.

What are the risks? Are my fingers safe?

Rest assured that ‘Bobby and the boys’ won’t be waiting for you in any empty car parks or down any dimly lit alleyways.

However, that’s not to say payday loans aren’t without their risks.

For starters, while the fee you are charged varies according to who you borrow from and how much your borrow, credit providers can charge you a one-off establishment fee of 20% and a monthly account keeping fee of 4%.

ASIC’s Moneysmart website has got a pretty handy calculator that shows if you borrowed $1500 to pay for unexpected car repairs, you would have to pay back $2040 over four months just to pay off your debt, or $2520 over one year.

Depending on how long it took you to pay back, that’s an extra $540 or $1020 you could have invested or spent elsewhere.

So if you’re relying on payday loans every time trouble strikes, you’ll soon rack up quite the bill.

If your financial situation takes a turn for the worst

Bad: If you default on a payday loan, the lender will likely charge you a default fee until you repay the outstanding amount in full.

Worse: If you do fall into default, the lender can then charge you twice the total amount of the loan.

Worser: If you fail to pay back the loan after falling into default, the lender can claim enforcement expenses, which are the costs of them going to court to recover the money you owe.

Worst: If you’re still unable to meet your debts by this stage, and have exhausted all other repayment options available to you, you may end up having to consider applying for bankruptcy.

Alternative options

Fortunately, other options are available for those in need of short-term cash, including:

– It’s always better to plan ahead rather than waiting until disaster strikes. So create a savings account where you put away 5-10% of each pay cheque for emergency situations. You can start today!

– See if you’re eligible to apply for a no or low interest loan instead. They’re available to people with a Centrelink healthcare or pension card.

– If you absolutely need to buy an essential household item such as whitegoods or a computer, you can see if the store has a 12, 24 or 50 month interest-free repayment option. Just make sure you cut up the credit card so you don’t get tempted to use it for anything else. And make sure you meticulously stick to a repayment plan or you may find yourself in a similar situation to the one outlined above.

Final word

You can save a lot of money by simply having an emergency funds buffer to lean back on.

If you’d like more tips or strategies on how to make your money work best for you, make sure you come and pay us a visit – we’re a much friendlier and helpful bunch than those Hollywood loansharks!

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

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