How to repay your payday loan
In your account within the day, but will you be able to repay it? Find out if you can afford the loan you're about to take out.
No matter how small an amount you’re borrowing or for how short a term, a payday loan is a financial commitment that you’re taking on. Before you click that ‘apply’ button you need to make sure you can afford it. There is no easy answer to this question, and often, you’re the only person who will know if you can manage the loan. How good are you at managing a budget? What are your other financial commitments? Are you taking on a bigger loan that you need? These are some of the things you’ll need to consider. So – how do you repay your payday loan?
Organising a budget
It seems like an easy suggestion, but a budget is an often overlooked step when it comes to short-term loans. This might be because of the nature of payday loans – they are usually applied for when people need quick access to finance, so they apply to make sure they can get the money rather than working out if they can afford it first.
The first thing you need to do is look at the repayment terms and fees offered by the lender. Then, you can work out how much your repayments will be based on how much you’re looking to borrow. This is where a payday loan calculator can be useful.
For instance – say you were looking to borrow $500. Fees on a payday loan under $2,000 are capped at 24% of the original loan amount, made up of a 20% establishment fee and 4% monthly fee. If you’re paid fortnightly, it can be assumed that your loan will be paid off in two installments (depending of course when your next payday is). The total amount you’d need to repay would be $620, which will mean two payments of $310. You can decide if these repayments will be affordable depending on how much you get paid.
What is affordable when it comes to a loan?
Again, there are no easy answers here. There is no definitive percentage that can be given to say, if 20% of your pay is left after bills are taken out and your repayment is made, that it will be enough to live off. People’s living expenses differ, and so this is where your budget may come in handy.
First, set out how much you need to pay in bills for the next month. This could include rent or mortgage repayments, any electricity, gas or water bills you have due, your phone bill, car repayments or insurance premiums, and write them all down. How much of each of your pay packets will be used to put towards bills?
Then, work out your living expenses. This isn’t an easy thing to determine, but it can help thinking day-to-day. Consider how much you need for groceries each week, petrol for your car, a few dollars for that morning coffee, etc.
After setting out your bills and your living expenses, add your determined loan repayment amount onto that. Do you have enough to cover everything? This is essentially a way to work out if you can afford the repayments.
Zoe's payday loan
For Zoe, finding a lender and applying for a loan was a lot easier than she thought. She compared her options and found a lender that looked good – they'd let her repay her loan early without penalty, and most importantly, she met their eligibility requirements. The trouble came when it was time to make the repayments.
The lender she applied with set out her repayment dates in her loan contract. They would direct debit her repayment amount on her next two pay days, as she was paid weekly, meaning she wouldn't have to worry about remembering to make her repayments. But when the pay came out of her account, she was starting to struggle to fund her living expenses.
Being paid fortnightly meant she never had long to wait for her next pay to come through, but when it did a huge chunk of it got taken out to meet her loan repayments. So even though she got the loan and met her repayments, not budgeting properly before her pay dates meant Zoe had a tough month to get through as she repaid her loan. She decided to be more organised and make a budget if she had to take out a loan again.
What made Zoe's loan unmanageable?
Zoe was paid $1,000 a fortnight but needed a loan of $350. Being paid fortnightly, this meant on each pay date $217 was direct debited out of her account to repay her total loan amount of $434. This only left her with just over half of her usual pay to manage her day-to-day expenses. This was a big jump in what she usually has to spend, and so she found it difficult to manage without a plan.
Managing your loan on any income
Whether you’re earning $30,000 or $130,000, there’s a way to manage your budget and repayments on your income. Generally, payday loans are sought by people on lower incomes, but there are several scenarios that see a high income earner take out a payday loan LINK. Keep the following in mind when it comes to managing your loan on a lower income:
- Make your repayments on time. Not doing this will see late repayment, direct debit dishonour and even default fees added onto the amount you owe. This can send you further into debt.
- Get in contact with your lender if you’re having trouble making repayments. This can help you avoid the fees mentioned above that you’ll be charged for paying later. Lenders are usually willing to help and able to sort out payment plans with you if you run into trouble, so they should be your first point of call.
- Only apply for a loan amount you can afford. Before you submit your desired loan amount, try and work out what the minimum amount you can get by on. Consider the fees you'll need to pay and how even a slightly higher loan amount will increase your repayments.
- Don’t take out several payday loans at once. Lenders are not legally allowed to lend to you if you already have a payday loan out, but this does happen. If you already have a payday loan and have not completely repaid it, do not apply for another loan. This can make your repayments unmanageable and send you into a debt spiral that can be difficult to get out of.
Payday loans can be a convenient form of financing to apply for, but you need to ensure the repayments will be manageable before you apply. By working out a budget and organising your finances, and only applying for as much of a loan as you need, you're on the way to managing your loan and getting it repaid on time, comfortably.