Payday loans in Australia

What is a payday loan?

A short term loan or "payday loan" is a form of credit that must be repaid in less than 12 months. The term of the loan will vary and can sometimes be as short as 16 days. Customers are usually required to make repayments in line with when they're paid (such as fortnightly), hence the term "payday loan".

People can apply for loan amounts up to $2,000, which come with fixed fees (rather than a standard interest rate) that are regulated by the government body ASIC. While each lender has their own fee structure, many will charge the maximum legal amount, which is a 20% loan establishment fee and a monthly loan fee of 4% of your outstanding loan. Some lenders may have more affordable options, so it's important to compare payday loans prior to submitting an application.

If you are facing financial difficulties and considering a payday loan, be sure to look into No-Interest Personal Loans or Centrelink Advance Payments before you apply.

Payday loan rates and fees explained

• 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.

What are the risks of payday loans?

• Unaffordable repayments. Payday loans are an expensive way to borrow money. Check the size of each repayment and ensure you will be able to pay on time. If you can't afford the repayments then you will end up paying late fees that will only make your financial situation worse.
• High rates and fees. Interest rates, late payment and default fees on payday loans are high. Make sure your lender is not charging you more than ASIC allows and check what you would be charged if you are late on a payment or if you can't pay back the loan altogether.
• Be careful who you borrow from. All the companies listed on our tables are accredited by ASIC. If you are thinking about taking a loan from a company not on our tables, check that it has a credit licence on the ASIC Register and ensure that the lender is easily contactable.
• Impact on credit score. Every loan application shows up on credit reports. While some lenders might not consider credit rating, applying for lots of loans in a short period can have a negative impact on your credit score. Building up a good credit score is important as it will help you to get better deals on financial products in the future.

How much do you want to borrow?

^{This calculator is designed to provide you with an estimate based on the numbers you enter. Your personal details are not taken into account and all calculations are based on the calculation model. This calculator is not intended to be the sole source of your information when making a decision regarding your loan, and this calculator also does not guarantee your eligibility. The calculator works on the following assumptions: fees do not change for the life of the loan, your lender will charge a 20% establishment fee and a monthly fee that is 4% of your principal loan amount. You may want to seek advice from a financial professional before signing up to a loan.}

Payday loans to suit your situation

How to apply for a payday loan

You can apply for a payday loan online and will need to meet the eligibility requirements to be approved. The applications can usually be completed online. The exact eligibility criteria will depend on the loan and lender, the application process usually involves the following steps:

How much will a payday loan cost?

Lenders who try to charge you more than these fees are breaking the law.

• Fees for loans under $2,000

  • Establishment fees. This fee is to cover the set-up of the loan and is capped at 20% of the principal.
  • Monthly account fees. Monthly fees are capped at 4% of the principal.
  • Interest fees. This is a percentage amount you're charged for the loan and comprises the monthly account fee and establishment fee.

• Fees and interest for loans between $2,001 and $5,000

  • Establishment fees. This fee is to cover the set-up of the loan. This is capped at $400.
  • Interest. Interest is capped at 48% p.a. of the principal.

• What other fees are associated with payday loans?

  Along with establishment and monthly fees, you may be charged fees in the following situations:

  • Late payment.You will be charged a late payment fee if you fail to make a repayment on time and don't inform the lender beforehand.
  • Arrears. A fee will apply if the account goes into arrears.
  • Collection. Any loans which are referred to collections or are defaulted on may incur additional fees.
  • Collection letter send-out. A lender may charge a fee if they have to send a collection letter because you have made a late repayment.
  • Statement fee. Some lenders may charge a fee for issuing a paper statement.

• Why don't you pay interest on a payday loan?

  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 can make references to the effective comparison rates and APR (Annual Percentage Rate), 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.

Reasons why your payday loan application could be rejected

• You have too many existing payday loans

  When someone applies for an SACC, all lenders have a responsibility to determine whether or not they can afford the loan, so as part of the application process they will need to determine if the applicant has:

  • Any other payday loans that they're currently repaying;
  • Any other payday loans that they're currently repaying;
  • Intentions to use this payday loan to repay another payday loan.

  If any of the above are true, a lender will need to take further steps to see if the applicant can afford the loan they're applying for. For some lenders, if any of the above is the case, that's enough reason to reject someone's application for a loan.

• You are currently unemployed

  If someone isn't receiving any income from ongoing employment, they will be limited in terms of lenders. However, there are lenders who will consider unemployed applicants. The applicant's eligibility will depend on the lender's criteria, whether or not they receive Centrelink payments, what type of Centrelink payments they receive and their general financial situation. If someone is unemployed, they may be seen as too risky a candidate, and the application may be rejected.

• Centrelink is your only source of income

  The Australian Securities and Investments Commission (ASIC) has specific guidelines for lenders for approving borrowers who receive Centrelink payments.

  If 50% or more of a person's income comes from Centrelink, their loan repayments (including any payments they're making to current loans) cannot exceed 20% of that person's income. If someone applies for a loan where their repayments will exceed 20% of their income, they will not be approved.

• History of dishonoured payments on your bank account

  If your bank account shows dishonoured loan payments – where a credit provider has attempted to debit a repayment from your account but there were insufficient funds – this may result in your being application rejected. Keep in mind that overdrawn accounts are also red flags to lenders, and may lead to a rejected application.

• Your job pays you in cash

  Being paid in cash can also make it difficult to be approved for finance. Lenders need to be able to verify a person's income, which is usually done using an applicant's bank statements. If the applicant deposits the cash that they receive as pay into an account each pay cycle, then lenders will be able to verify it. If someone doesn't deposit it, they'll need to find a lender who can use their payslips as verification.

  If a lender cannot verify a person's income, it won't be able to approve that person for a loan.

• You've made payments to gambling sites

  Lenders use a person's financial situation to determine how much of a risk they are to lend to. If lenders see evidence on an applicant's bank statements of them making payments to gambling companies like online betting websites, on a regular basis, they may be flagged as high risk and rejected.

• Failing to meet the minimum requirements

  Before someone submits an application for any payday loan, they should ensure that they meet the minimum criteria. Age, employment, income and residency requirements are usually set to establish to borrowers factors that the lender will definitely not accept. If someone doesn't meet all of these criteria, they will be rejected. While this criteria will vary from lender to lender, absolutely all lenders will require applicants to be over the age of 18. In addition, almost all lenders will require the borrower to be an Australian citizen/permanent resident and to have some form of income.

Frequently asked questions about payday loans

• What if I can't repay my payday loan?

  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.

• 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. See Finder's guide to loans for pensioners to compare loans for pensioners and alternative options.

• 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. See Finder's guide to getting a loan on Centrelink payments for more information.

  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.