Repaying payday loans early

For people with active payday loan debts, finding themselves in a position where they can repay their loan early can help them to save money over the life of the loan. Repaying early can save customers money in fees and make their budgets easier to manage. However, not all lenders have the same rules in place when it comes to repaying early, and some may enforce penalty charges for doing so.

How to repay a payday loan early

Before making early repayments or repaying the entire loan in full early, payday loan holders should consider the following:

• Checking their loan contract for early repayment terms and conditions. A loan contract establishes any fees or penalties that might be payable, as well as any stipulations regarding an early repayment of a loan. It's best for people to be aware of these before they contact their lender regarding early payment.
• Getting in contact with their lender. Lender's contact details can be found on their website, on emails they have sent to their customers or on the loan contract. Loan customers should enquire as to how they are able to repay the loan early, what fees apply and if any savings or discounts are available. Payday loan customers should also ask how quickly they can settle the loan, because the more quickly it can be settled the more they could save.
• Follow a lender's instructions. Customers should follow the instructions given to them by the lender to ensure the loan is paid out correctly.
• Ensure the payment has gone through and the loan is closed. After paying the loan out, it's a good idea to make sure the account is closed to avoid mistaken charges.

Potential savings available by paying a payday loan early

How much someone can save will depend on how early they repay the loan, and whether there are any charges for doing so. It also depends on the type of payday loan the customer currently holds and whether it is a small or a medium loan. If a loan was for an amount less than $2,000, customers are usually charged a 20% establishment fee and 4% monthly fees.

Example:

Sarah takes out a loan of $1,000 for a period of 3 months. Her establishment fee is $200, her monthly fees are $120 and her fortnightly repayments are $220. If she exits her loan 1 month early, she will save $120 over the life of the loan.*

However for medium payday loans, or loans of over $2,000, loan customers are charged an annual interest rate (not exceeding 48% p.a.). These repayments will generally be weekly, fortnightly or monthly and structured around when the person receiving the loan gets paid. By paying their loan early, someone will be charged less interest over the course of their loan.

Example:

Joe takes out a loan of $3,000 over a period of 2 years. Assuming Joe pays an interest rate of 40% and monthly fees of $10, his repayments are currently $194 p/m and his total repayments at the end of a 2 year period would total $4,646. If Joe repays his loan in just 1 year, his total repayments will only be $3,809, a saving of $837.*

*Please note that all examples are fictional and do not take into account any penalty fees or charges that may be incurred by early repayments.

What are the risks of payday loans?

• Unreputable lenders. Check the lender has a credit licence and is not charging you more than ASIC allows. The lender should be easily contactable.
• Unaffordable repayments. Consider the size of the regular repayments and ensure the loan is able to be repaid during the loan term. If not, extra fees apply to extend it. Be careful, since repayment periods for these kinds of loans tend to be shorter than regular loans.
• Multiple applications. Every loan application shows up on credit reports. While lenders might not consider credit history, several applications within a short period can have a negative impact on your credit score moving forward.
• Check rates and fees. Establishment and monthly fees are capped, so be wary of lenders quoting prices beyond the legal maximum amounts. Be crystal clear on what will be charged for late payments or a default on the loan. The total cost of the loan matters here - lenders can charge interest rates on top of everything else.
• Long-term repercussions and legal issues. Once the loan agreement is signed, the customer is bound to its conditions until the loan and any associated rates and fees have been paid. Typically these loans are unsecured, which means that the lender can initiate legal proceedings against the customer if they can't repay.

Which lenders allow early repayments?

The list below highlights which lenders allow early repayments and how to organise an early repayment.

How to make sure a payday loan's repayment structure is fair

There are a number of factors to consider around payday loan repayments. Here is what to look for:

• How frequently do you make repayments? Usually, payday lenders will set up direct debit repayments on whatever date their customers get paid. However, other lenders may let their customers select the repayment frequency, with choices between weekly, fortnightly or monthly. Loan customers should ensure this option will put them in the best position to have sufficient funds in their account when the direct debit is taken out.
• Are the late repayment fees excessive? Payday lenders are legally allowed to charge late payment fees but there is no cap on how much they can charge. It only takes one late payment or failed direct debit to see multiple charges stack up. For example, a lender may be able to charge you a failed direct debit fee, a daily late fee, a collections letter fee and other fees. A bank can also charge a failed direct debit fee on top of these costs. This could see customers charged $100 or more for one late payment if they don't contact the lender ahead of time. Prospective payday loan applicants should remember to check every fee that they might be charged before applying for a loan and choose a lender with fewer fees, where possible. If someone thinks that they might have trouble making a payment, they should contact the lender to reschedule the payment.
• Is the lender easy to contact? Ease and flexibility with repayments depend a lot on the lender being easy to contact. See if the lender displays its contact number on its website and answers the phone, check if it has a live chat service and you can also test how long it takes for it to respond to an email.

Repayments are an important part of any payday loan as they can either help keep the loan costs manageable by being flexible or cause the loan to become unmanageable by being too rigid. Among other things, payday loan customers should make sure that they check if they can repay their payday loan early before they apply.

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