Have questions about payday loans? We’ve got you covered.
Before you take out any type of loan it’s important to understand how it works. The same is true of payday loans. We’ve put together some of the most common questions we’ve been asked about payday loans so you can learn a bit more about them, and find out if they’re the right type of credit for you.
What is a payday loan?
A payday loan is a small, short term loan. The loan amount is usually between $100 and $2,000 and the loan terms are usually between 16 days and one year.
Why is it called a payday loan?
It’s called a payday loan because the loan amount is designed to be paid back when you next get paid. The amount you are lent is small, and you are only lent what you will receive in your income over the next month or so.
What interest and fees are charged with payday loans?
The Australian government has placed a fee cap for payday loans. As of the 1st July 2013, payday lenders are only able to charge the following fees:
- A one-off establishment fee which is 20% of the amount loaned.
- A monthly fee which is 4% of the principal loan amount.
- Any applicable government fees or charges.
- Fees or charges if you default on the loan.
- Enforcement expenses if the lender is forced to take you to court to recover the money you owe them.
If the fees are capped at 24%, why do people talk about interest rates that are almost 1000%?
It's important to keep in mind that lenders do not charge interest on payday loans, and are only allowed to charge fees that are expressed as a percentage of the amount you borrow. While these fees are capped at 24%, it's charged over a shorter space of time compared to other forms of credit. Most other interest, including interest on credit cards, personal loans and home loans, is charged annually, compared to payday loans which is charged monthly.
How does the interest on a payday loan compare to personal loans and other forms of credit?
As mentioned in the question above, most other credit accounts, including personal loans, home loans and credit cards, charge interest at an annual rate, whereas payday loans charge interest (in the form of fees) for much shorter period of time. In that sense, you should be considering the interest charged on a payday loan by multiplying it so you can better compare.
So, if you take out a payday loan of $500 for a period of 30 days, you will be charged 24% in fees. You will pay $120 in fees, totalling $620 in principal and repayments. If you are charged 24% for one month’s worth of repayment, you are essentially paying the equivalent of 288% p.a. (12 months x 24%). Remember to keep this in mind when you are considering how competitive payday loans are compared to other loans and forms of credit.
What are the loan terms for payday loans?
Payday lenders differ on the terms they offer, but the minimum terms they are able to offer you is 16 days. Lenders usually offer terms that line up with your pay structure, for instance, if you are paid fortnightly they might let you repay the loan in two fortnightly repayments, whereas if you are paid monthly you may have to pay the loan back in full when you next get paid. The lender should outline their proposed terms in a loan contract before you agree to the loan.
How quickly do I receive a payday loan?
Payday loans usually have a quick turnaround time, although the actual time is different for each lender. Upon approval, some lenders may be able to transfer you the money within 60 minutes, while some may be able to transfer you the money within one business day or more.
Can people with bad credit get a payday loan?
As these loans are small and the repayments are structured around your next payday, the eligibility criteria tends to be a bit more flexible. Although, keep in mind that lenders will still differ in their lending criteria. Most payday lenders will be more concerned with your ability to pay back the loan rather than your credit history, and so will focus more on your income and your financial activity over the last three months.
Do payday lenders do credit checks?
Some payday lender will carry out credit checks, but not all will. They will usually outline this on their website.
Are payday lenders "dodgy"?
Unfortunately, there are "dodgy" lenders who do prey on people with poor credit. In saying this, there are some very reputable lenders who may be able to offer you genuine help.
How can I stop payday lenders calling my employer?
Payday lenders may get in contact with your employer for a few different reasons, one being to confirm your employment and income amount. Therefore, a way to avoid this is to provide enough documentation when you apply so that the payday lender will not need to contact your employer. Keep in mind that this is not an option for every lender. If you want to know whether the lender will contact your employer, you can give them a call to confirm this.
Some lenders also offer this information on their site under the FAQs. For example, Nimble requires that you give your payroll officer permission to speak to them, while Loan Ranger needs to make a quick call to your employer to check that you work there.
How do I find a reputable payday lender?
Most payday lenders operate online, so you will be able to use their website to judge their reputability. When looking at their site you can see how transparent they are with information regarding their fee and payment structure, and you can also see how easy they are to contact. You can also read third-party customer reviews of their services online to see other people’s experiences with them.
How do I compare payday loans?
You first need to decide what your needs are as a borrower, and why you are borrowing the money. You can then compare payday loans by their rates and fees, as well as their flexibility with repayments. You can also look at how quickly the lender is able to have the money to you, and whether that meets your borrowing needs.
If you have any other questions, feel free to ask them in the comments section below, or visit our forum and discuss payday loans with fellow finder.com.au users.
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