Payday loans Australia

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What is a payday loan?

A payday loan, also known as a short-term loan, is designed to be repaid very quickly – ideally by your next payday. It should be used as an absolute last resort, as the fees and interest rates and much higher than you'll pay for other types of loans.

You usually have between 16 days and one year to pay the loan back, and the longer it takes you to repay, the more fees you'll pay.

There are strict laws in Australia around what you can and can't be charged by payday lenders:

• You can borrow a maximum of $2,000.
• The lender must charge fixed fees, rather than an annual interest rate.
• Fees are regulated by the Australian Securities and Investments Commission (ASIC).

How does interest work with payday loans?

Licensed lenders are not allowed to charge interest on payday loans, but they can charge a lot in fees. When you take out a payday loan, even if its only for a few weeks, you'll have to pay back a lot more than you borrowed.

Each lender sets their own fees, but the maximum legal amount is:

• 20% loan establishment fee
• a monthly loan fee of 4% of your outstanding loan.

For example, if you borrow $500 for one month, you could pay a maximum amount of $100 establishment fee and $20 for the month.

Some lenders may have more affordable options, so it's important to compare payday loans prior to submitting an application.

What are some things to be aware of?

• Your repayment for a payday loan can not be more than 10% of your after-tax income over the repayment period. For example, for every $100 you earn after tax, your repayment can be worth no more than $10.
• Payday loans are fast. When you need a quick option to access cash immediately, a payday loan means you can get the cash in your account the same day you apply. But, you pay a premium for this.
• If a medical emergency occurs, your car needs repairs, or some other unexpected expense pops up and you have bad credit, a payday loan can give you fast access to cash if you aren't eligible for a loan from banks or other financial institutions. But if you don't pay it back in time, the fees get very high.
• The fees on these types of loans can really add up. You might pay an early repayment fee for paying off your loan early; and a late payment fee if you don't make a repayment on time and you don't inform your lender beforehand.
• There are usually cheaper ways to borrow money when you need it. If you're struggling with your overall budget or you're getting a payday loan to pay off another loan, talk to a financial counsellor. The National Debt Helpline is free and confidential.

What are some alternative ways to borrow money?

Product	Mainly used for	Pros	Cons
No interest loan scheme	Money for emergency purchases for eligible individuals	No interest, fees or charges; access up to $3,000	Very specific eligibility criteria as this is a not-for-profit organisation
Buy now pay later	Paying for a purchase in 4 regular instalments, usually over 6 weeks instead of all at once	Relatively easy approval process, usually no interest or monthly fees	Most have low credit limits. Can encourage unnecessary spending
Pay advance apps	Accessing a portion of your pay ahead of time	Relatively quick and easy access to money. Generally no credit checks	You're charged for every withdrawal, regular use can become expensive
Debt consolidation	A way to merge multiple debts into an easier-to-manage and potentially cheaper loan	Simplifies managing multiple debts, can result in a lower interest rate	Your rate is often based on your credit score. Only worthwhile if your new debt is cheaper than your existing debts
Payday loan	Quick access to up to $2,000	Faster than many forms of credit, easier approval for people with low credit scores	Extremely expensive, must be paid off in under 12 months
Centrelink Advance	Receiving an advance on your next Centrelink payment	No interest or fees	The amount withdrawn comes from your next payments

• Transcript

  Hi I'm Elizabeth, personal loans editor at finder.com.au. If you're thinking about applying for a short-term loan one of your main concerns is going to be the cost. We're going to break down those costs so you can decide if these loans will work with your budget.

  Short-term loans are one of the most strictly regulated loans available and because of this lenders are restricted as to how much they can charge. The credit regulator ASIC has made it so that lenders offering loans of less than $2,000 with terms of between 16 days and 1 year can only charge fees and not interest rates. That's right, these loans actually come with no interest. The reason people think that interest is charged on short-term loans is that the fees are expressed as percentages.

  So let's look at these fees. The first fee that you need to consider is the establishment fee. Lenders cannot charge you more than 20% of what you borrow for this fee. The second main fee you need to consider is the monthly fee. Lenders cannot charge you more than 4% for this fee. Remember that these restrictions only apply to loans of less than $2,000 with terms of between 16 days and 1 year. If you're borrowing more, different restrictions will apply.

  Now you know how much you can be charged, let's look at an example. Let's say I take out a loan of $500 with terms of 62 days, which is a pretty standard loan term offered by short-term lenders. In total, I will repay $660. This includes my original loan amount of $500, my establishment fee which equals $100 and 3 monthly fees of $20 each. So now you know how much short-term lenders are able to charge and how to work out how much you will pay when you take out one of these loans. Remember though that not every lender will charge you the maximum allowable fees, so compare your options before you apply. To find out more about short-term loans and how to compare them, head on over to finder.com.au.

Frequently asked questions about payday loans

• Is there such a thing as 100% guaranteed approval?

  There are no payday loans in Australia who offer 100% guaranteed approval. Every lender has eligibility criteria, and while some have more relaxed rules than others, all lenders will reject applications from borrowers they see as too risky.

  You should be very sceptical of anyone offering guaranteed approval.

  If you don't make repayments on time you will be charged a fee. These fees are often flat payments which can add a lot to the total cost of your loan. Any defaults on the loan will also be listed as a negative mark on your credit report and can remain there for as long as seven years. If you already have a loan and you don't think you can make a repayment, contact the lender to discuss what your options are. Reputable lenders will work with you through processes such as payment plans.

• Are payday loans a bad idea?

  Payday loans are an expensive form of credit and you should compare your options as well as research any rates, fees and conditions before applying. While payday loans are heavily regulated by ASIC, it's important to remember that they are costly and you shouldn't apply if there are alternatives available to you. Before you apply, see if you may be eligible and if the other credit types suit your needs. It's also a good idea to calculate costs to see if any of the alternatives are cheaper than a payday loan.

• How quickly will the money be in my account?

  This differs between lenders and will also usually depend on who the applicant banks with. If the lender uses the same bank as the applicant, they can receive their funds within minutes of being sent. Some lenders are able to do this if a customer banks with any of the Big Four.

  With most, customers will need to apply and be approved by a certain time (usually around 2pm) for the funds to be received on the same day. If an applicant needs their loan today, the earlier they apply, the better chance they have.

• Why do payday loans not charge interest in Australia?

  Payday loans have tight restrictions and regulations under government reforms that set limits on how much payday lenders can charge you. Because of this regulation, and because most payday loans have loan terms of less than a year, payday lenders cannot charge you interest the way other lenders do, since other lenders calculate their rates annually. They therefore just charge a percentage of the amount borrowed. They can make references to the effective comparison rates and annual percentage rate (APR), but it's important to remember that payday loan interest rates are based on a shorter loan term than the standard APR calculation of 365 days.

• Can I pay out my payday loan early?

  Many payday lenders allow customers to pay their loan early without any extra fees associated. However, customers will still need to pay the full amount associated with the credit contract. Contact your payday loan credit provider if you need to organise an early payment.

• Are pensioners eligible for a payday loan?

  Some lenders consider a pension as an eligible form of income. However, whether you're approved will depend on your specific situation and finances.

• Can I take out a payday loan if I receive Centrelink?

  Some payday lenders and institutions do consider Centrelink payments as income, so you may be eligible for a loan. Most lenders won't approve someone if government benefits make up more than 50% of their total income.

  In line with Australian government regulations, you can not renew or roll over your loan. If you want to take out another loan, you'll first have to pay off your current loan and then re-apply (after assessing your current financial situation).

• Should I use a bank overdraft or a payday loan?

  An overdraft account can be a practical solution for repeat borrowing scenarios, especially since you don't have to keep reapplying for a new loan. Although in some situations, an overdraft may not be so useful. If you need more funds than what an overdraft can give, a short-term loan may be another option. Also, not everyone qualifies for an overdraft. With short-term loans, you are able to get access to lump-sum loans that will reach your account within 24 hours.

To make sure you get accurate and helpful information, this guide has been edited by Joselle Delos Reyes as part of our fact-checking process.

Written by

Sarah Megginson

Head of editorial

As an authority on all things personal finance, Sarah Megginson is passionate about helping you save money and make money. She is an editor and money expert with 20 years’ experience and an extensive background in property and finance journalism. Sarah holds ASIC RG146-compliant Tier 1 Generic Knowledge certification, and she's a regular media commentator, appearing weekly on TV (Sunrise, Channel 7 news, Nine news), radio (KIIS FM, Triple M, 3AW, 2GB, 6PR) and in digital and print media. See full bio

Sarah's expertise

Sarah has written 194 Finder guides across topics including:

• Home loans
• Personal finance
• Budgeting and money-saving tips
• Managing the cost of living