Are "bad credit" credit cards the next step for payday lending?
Payday loans, as a product, are contentious. These loans appear in the media for the wrong reasons as often as they do for the right. While the potential problems – vulnerable customers lured into debt traps and sky-high rates and fees – may make for easy headlines, the potential positive benefits and innovations in the payday loans space are often ignored.
Payday lenders have introduced innovative loan applications and experimental software that enables them to have money transferred into borrowers’ accounts before conventional banks would have even started trawling through payslips to kick off the assessment process.
While it's easy to think of payday lenders as unconventional because they're a less obvious choice than banks and credit unions, they're also unconventional in another sense. They deal with borrowers on lower incomes who receive Centrelink payments, and often have credit histories riddled with defaults or bankruptcies. Effectively building a business by working with these clients has led these lenders to think outside the box.
So what’s next for the bad credit space?
When borrowers were turned away from banks for personal loans, they turned to payday lenders for smaller, higher cost loans, but those don't solve every financial problem. Operating without a credit card in the modern Australian economy can be challenging, and at finder.com.au, we regularly receive questions about credit cards for people with bad credit.
While banks are not yet making a move to find a solution for the problem of bad credit borrowers needing credit, payday lenders are introducing stopgap solutions.
Prepaid debit cards are one prominent example. While the functions of these cards differ, most of them work in essentially the same way:
- Receiving the card. You apply for a payday loan with the lender, and if you’re approved you are either instantly sent a prepaid card or you elect to have one sent to you.
- How the card functions. After the lender sends you your card you can receive instant loans from through it – "instant" meaning within a few minutes of approval. In this way, the card functions in a similar fashion to a credit card. Most lenders also let you load your own funds onto the card to spend online, in store or to withdraw cash from ATMs.
- What the card costs. When you receive a loan onto the card you will be charged however much the loan costs – if it’s below $2,000 it will be 24% of the principal for a one-month loan. This is slightly higher than a typical credit card cash advance rate. Other fees to watch out for include ATM withdrawal fees, load fees and transaction fees.
Which lenders are offering free payday debit cards?
When you’re approved for a Nimble loan, let the company know you also want a prepaid debit card. You will receive your card within 5 to 10 business days and can use it to do the following:
- Receive approved loans from Nimble
- Load your own money via BPAY or through the direct credit ("Pay Anyone") facility
- Spend with your card anywhere prepaid Visa cards are accepted – online, in-store or overseas (subject to a 2.99% foreign transaction fee)
- Manage your spending through the online Member Area that offers feedback and graphs
You become eligible for a MoneyMe Express Visa Card when you are approved for a MoneyMe loan. To receive your card you will need to opt in via the Member Area and verify your ID, be an Australian resident and have your contact details up to date. After you request your card it will be delivered by Australia Post and arrive within 7 to 10 business days. Armed with your MoneyMe Express Visa Card, you’ll be able to:
- Receive MoneyMe loans onto your card
- Top up your Visa card (after activation) with your own funds through Internet banking
- Pay for purchases online, in-store and over the phone anywhere prepaid Visa cards are accepted (this includes overseas for a foreign exchange fee of 2.99%)
- Check your balance and keep an eye on your transactions in the MoneyMe Member Area
If you apply for a Cash Advance from SRG Finance, you are eligible to receive a Prepaid Visa Card. You may also eligible if you have applied for an SRG Finance Personal Loan and have been approved for $1,000 or less. When you take out either of these loans and let SRG Finance know you want a card, it will be issued to you via Australia Post. The card has several features, including:
- Use your card to receive SRG Finance Cash Advance Loans or Personal Loans up to $1,000
- Add your own funds to the card using the electronic funds transfer "Pay Anyone" function
- Pay for purchases under $100 in-store using Visa PayWave
- Withdraw funds and check your balance for free at Westpac ATMs
- Use your card in-store, online and overseas (subject to a 3.5% currency conversion charge)
- Manage your account online on the SRG Finance website
360 Cash Loans
After you successfully repay your personal loan of between $150 and $4,000 with 360 Cash Loans, you will be issued a Financier Debit Card. This card gives you access to any subsequent loans you take out and is also attached to a personal bank account. Its features include::
- Receive any further approved loans instantly on your card and access them via an ATM (urgent loans transferred into bank accounts attract fees, loans transferred into Financer Cards do not)
- Check your balance, transaction history and check/change your personal details
- Use your card anywhere prepaid Visa cards are accepted including online, in-store and over the phone
- BPAY and transfer your own funds onto the card for convenient use
Existing Spotme borrowers can may have been eligible to receive the Spotme Prepaid Card. You will be sent your card and if you want to use it you can activate it on the website. As SpotMe loans come with lower-than-average fees totalling 12% (9% establishment fee and 3% monthly fee) using a SpotMe card to receive your loan will work at cheaper than a typical credit card cash advance. SpotMe’s card comes with a number of other benefits, including:
- No fees paid to SpotMe to use the Prepaid Card
- If you use a Westpac-branded ATM you can avoid ATM fees, otherwise you may be charged fees to withdraw cash and check your balance
- Receive your SpotMe loans quickly and easily directly onto the card
- Use your card anywhere EFTPOS is accepted
While Cash Converters doesn't yet have a prepaid card, the lending giant will do in the near future. It signed a partnership with Emerchants In mid-September 2015 that will allow it to offer prepaid cards to customers, who will be able to access their approved cash advances using it. The program is set to be implemented in November 2015.
How can I compare these cards?
Use the table below to compare fees, charges, load amounts and ATM fees.
|Max Amount YTD||$50,000.00||$50,000.00||$50,000.00||$50,000.00|
|Max Daily Withdrawal||$2,500.00||$4,000.00||$1,000.00||$4,000.00|
|Card Purchase Fee||$0.00||$0.00||$0.00||$0.00|
|ATM Withdrawal Fee||$0.00||$0.00||$0.00||$2.00|
|Foreign currency conversion fee||2.99%||2.99%||3.50%||2.99%|
How do these compare to bank prepaid cards?
Another alternative to prepaid payday cards are bank overdrafts with a debit card attached. These generally have a lower interest rate, usually around 16-20% p.a. rather than the 24% p.a. for a one-month payday loan under $2,000.
There are a few key differences with overdrafts that you should be aware of. The first is that they are a revolving line of credit, so there is no repayment date. While this can seem flexible and convenient compared to the short repayment terms on payday loans, remember that having no set term can encourage you to extend your repayments and see you paying more interest.
The interest on overdrafts is charged at an annual rate rather than a monthly rate, as is the case with payday loans, and you will only be charged interest when you start using the facility. Your overdraft will be attached to your transaction account.
So why not get an overdraft?
Overdrafts are an option for borrowers to consider, although the eligibility criteria aren't as lenient. Banks need to know you will be able to pay the overdraft back so your credit history, income and transaction history will be considered. Your options will be limited, because if you have bad credit or are on a lower income, banks will want you to have a history with them they can use to verify you, so you will need to apply with a bank you already have an account with.
Are payday debit cards the next "bad credit" credit cards?
While they aren’t exactly "credit cards" in the traditional sense, prepaid payday cards are an example of lenders moving forward in the bad credit financial space. Yes, the loans the borrowers receive on these cards are high-cost, but the cost of convenience has always been higher – the same is true of credit card cash advances.
Borrowers will continue to take out payday loans as long as they need money and as long as they have no other option. If they have a more convenient way to receive the money, and a way to continue to use this facility and load their own money onto it, then this could be a stepping stone for the rest of the financial industry to develop more innovative products for these borrowers.