When would you need to take out the loan everyone's saying you shouldn't take out?
We live in a world that runs on credit. Loans so you can buy a place to call home, credit cards to stretch your spending for larger purchases, and personal loans for financing when you need it. But what if you are on the fringe of eligibility for these traditional forms of credit, or what if applying for one won't get you the money you need in time? Payday loans, although coming with a less-than-favourable reputation among some in the financial industry, offer an alternative to those people who need it.
So, who are the people who need it, and what are some of the situations a payday loan might be a credit option for you to consider? We take you through some scenarios where a payday loan might make sense.
1. When your current forms of credit are maxed out
Maybe you're in a position where you have been approved for credit cards and even other loans before. Consider this: you have a credit card that you're currently paying off, but circumstances get in the way and you need to max it out. If you aren't eligible for additional credit – whether due to having too much credit out already, bad credit history, or your income not being sufficient or regular enough – a payday loan might be an option to consider. If you borrow below $2,000, fees are capped at a 20% establishment fee and a 4% monthly fee – your repayments will be in line with your pay cycle, so organise a budget so you'll be able to manage that and your other credit repayments.
2. You have bad credit and won't be eligible for conventional loans
Bad credit is more common than you think, and can happen to anyone. One missed payment or default could stay on your file for years, and can impact your ability to be approved for traditional forms of credit. If you run into an emergency and need funds to see you through, this might be a situation where you can consider a payday loan. This is, of course, after you've considered your other options, including using any forms of credit you currently hold (credit cards, overdrafts) and getting in touch with your current bank to see if you might be eligible for a small overdraft.
If you're borrowing a small amount of money, you'll know how much you have to repay before you take the loan out – your original loan plus . The repayment dates will be set out in your loan contract, letting you budget.
3. Your car broke down and you need a loan...today
Unless your bank offers same-day personal loans, or you have an overdraft or credit card, a payday loan is one of the only forms of credit that you can apply for and see the money from on the same day. Emergencies are called as such because not only do they happen when you least expect them to, but they also have a sense of urgency. Payday lenders cater to these emergencies by letting you apply for your loan online, with many lenders not requiring you to submit or fax bank statements.
Applying online usually only takes a few minutes and you can find out if you're approved in seconds. When it comes to receiving your loan, it usually depends on who you bank with, but the cut-off is normally around 2pm for receiving your loan amount on the same business day. If you've already had a loan before, many payday lenders have an easy repeat borrowing service that makes getting your next loan simple.
4. You're about to start a new job
Starting a new job, no matter how much you're earning at your current on next job, can leave you in a tight financial position. What happens if a new job comes along quickly? Will you have enough time to save enough to tide you over until you next get paid? This is a situation some find themselves in.
The trouble with traditional personal loans is that they have a minimum repayment term of one year, which is often too long for this kind of scenario. If you don't already have a credit card, applying for one and having it sent out is a process that also might be too longwinded. Also, conventional credit often involves a call to your employer, and if it's found out you're soon leaving your job you may not be approved.
If you need a quick financing solution, a payday loan is one to consider. One advantage of it in this scenario is that you can pay the entire thing when you get paid on your first payday – just ensure you have plenty leftover for your bills and living expenses.
5. You're self-employed and need to cover an emergency expense
A difficulty with personal loans and credit cards is that you are often required to have a stable form of employment and a regular income. When applying, lenders will often ask how you are employed, require the name of your employer, and also ask for a set amount of how much you earn per year. For self-employed people, the requirements are more stringent, with lenders requiring two years' worth of tax income statements, and often having higher minimum incomes set for those who are self-employed. This is due to the sometimes uncertain nature of self-employed people's income.
So, with all this extra documentation required, how are those who are self-employed expected to access emergency credit. And, even if they can gather their documentation, who's to say they will be employed? While some payday lenders require you to be earning a steady income or in full-time employment to receive a loan, others only require you to be employed and not receiving benefits or to be earning some sort of income. Check the requirements of each lender before you apply, but if you're self-employed and in need of emergency cash, a payday loan could be an option for you.
6. You've found the place. Now all you need is the bond money.
The housing market in Sydney is, unfortunately, not a renter's game most of the time. If you go to inspect a property, you're likely going to be fighting it out with at least ten other prospective renters. So what happens if you not only find the perfect place, but are then actually approved? You'll need to come up with the bond money in order to secure it. You might be lucky and the timing might work out with your previous property – you could be given the bond back just when it's time to hand over the new bond. But keeping in mind property inspections, changing amounts required for bond, and the fact that you're not usually sent the bond money until you leave the property, this is unlikely to be relied upon as a source of funds.
If you don't have the money saves and don't have any other financial options - a low interest credit card or even an overdraft linked to your account – then a payday loan could see the bond money in your account quickly and your new place secured. While the interest rate is higher than what you'll pay with other financing products, the repayment period is short and you know how much you have to repay before you borrow. If you budget correctly and know you'll be able to afford the repayments before you move out, a payday loan can help you get the bond money you need.
How much will it actually cost you to borrow?
7. You get a vet bill you weren't planning for...
Our four-legged friends – sometimes even two-legged or no-legged – are a great addition to many Australian's lives and homes, but what happens when they need extra care? Most of us say we wouldn't think twice about getting the best care for our pets, but sometimes our finances don't allow for it. Picture this: you take your dog to the vet and they say he needs emergency treatment and the bill needs to be paid within the week. Your pay doesn't come for another two weeks, how are you going to manage it?
If you have a credit card with a limit that will allow for the payment, then that's one option you can consider. There are also personal loans that you could look at taking out, but these are often for much larger amounts and for extended periods of time – usually a minimum of one year and with a minimum loan amount of $2,000. If you don't need that much and you've worked out you can afford the repayments – a 20% establishment fee plus a 4% monthly fee – then a payday loan could be an option. Better yet, you'll get your loan amount within about one business day depending on who you apply with and when you submit your application.
So, do you need a payday loan?
There is no easy answer to this question. Whether or not a payday loan is right for you depends on what financial position you're in, why you're looking at taking out the loan and how you're going to manage your repayments. You need to decide whether this is the best option for you, and if you do, find the best lender to apply with. Remember that payday lenders have different eligibility criteria, so compare your options and find a lender that you are eligible for before you apply.