In the US, there are more payday loan lenders than there are McDonald’s stores (crazy right?!). In the UK, the industry is worth more than $3.6 billion. In Australia, annual turnover of the payday loan industry is just over $1 billion.
The lifeblood of this industry is hardship and financial stress and unfortunately, recent times have provided plenty of it. And the scary truth is, that twenty-one per cent of Australian households don’t have any way to access $500 in the case of an emergency.
Payday loans have been around for 20 years, so they are not new by any means. What is new however, is the number of players and the marketing tactics used.
From the impact they make on your credit file, to high interest and revolving credit terms, we give you the facts on payday loans and why you should beware.
What are Payday loans?
Payday loans are designed to meet a cash shortfall and are generally repaid within 30 days, although terms of up to a year are available.
These loans are a high-cost short-term loan for small amounts of up to $5,000 and are usually not the first loan of choice for most people.
Payday loans are often taken out due to necessity from a bad credit history, a need for a quick financing solution or simply because of the ready availability of short terms and low amounts.
Loans are usually repaid via direct debit or a pay deduction.
Warning!
The Impact on your credit file
What you may not realise about these loans, is that they do in fact appear on your credit file.
Your credit file has three sections;
- Consumer credit information
- Commercial credit information
- Public credit information
Any payday loans you apply for, or take out, will be listed in the consumer credit section.
The following information will be visible:
- Credit enquiry
An application of a payday loan, or any other type of credit. - Type of credit
This will be listed as a personal loan on your credit report. - Account terms
The opening date and closing date of the account. - Credit limit
The amount of your payday loan. - Payment history
The payment information of your loan, including whether you made your payments on time. - Defaults/overdue accounts
A missed payment and/or account default.
High interest rates & fees
Luckily, in recent years, payday lenders have been restricted on how much they can charge borrowers in interest and fees. However, many interest rates are still at a staggering 48% per annum! That’s more than double the average credit card interest rate in Australia.
Say you take out a loan of $5,000 and take 1 year to pay it back, you will end up paying $2,400 in interest alone. And we haven’t even started on the fees and charges!
Should you miss a repayment (a “default“), you could be charged up to 200% – twice the amount loaned!
But wait there’s more… On top of that, fees and charges on payday loans can include an establishment fee of 20% of the loan amount, and a monthly fee of 4%.
These high interest rates and fees are just some of the many reasons it is paramount you do your research prior to applying for any payday loans (or any loan for that matter).
Revolving credit terms
Unlike a personal loan with a fixed term, payday loans do not have a fixed number of payments.
If you make regular, consistent payments on a revolving credit account, such as a payday loan, the lender may agree to increase your maximum credit limit – like a credit card.
Non-revolving lines of credit, such as a personal loan, have the same features as revolving credit (or revolving line of credit). A credit limit is established, funds can be used for a variety of purposes, interest is charged normally and payments may be made at any time.
There is one major exception: The pool of available credit does not replenish after payments are made. Once you pay off the line of credit in full, the account is closed and cannot be used again – Brilliant for steering clear of debt.
One of the dangers of some payday loans, is that they can be used again and you can keep borrowing.
What happens from there? Payday loan borrowers can get stuck in a revolving door of debt – Not a happy place to be.
What do we say about Payday Loans? Borrowers beware. Debt can quickly become unmanageable and you can feel as though you are drowning in debt.
At Life After Debt ®, we can help you reduce unmanageable debt by offering you affordable, practical debt solutions that are proven to relieve hardship. Check out our case studies and debt relief options such as Informal Arrangements or Part IX Debt Agreements to avoid bankruptcy, or simply contact us today to receive honest and sympathetic advice, without judgement.
Stress relief from debt relief – Life After Debt