Why you should always avoid payday lenders!

David Berry, Way Forward CEO 

Most people have heard of payday loans, but unless you’ve sought one out, you might not know what they are or why people use them. And most importantly, why it’s a really good idea to avoid them.  

Read on to discover why savvy consumers choose to steer clear of these products.  

How do payday loans work in Australia? 🇦🇺

A payday loan, also called a small amount loan, allows you to borrow up to $2,000. You then have between 16 days and one year to pay it back. Payday lenders will often promise that they can provide cash quicky – which they usually can – but there are several catches. Most importantly, since licensed lenders who provide payday loans cannot change interest, they charge you large fees instead. There are also unlicensed  

Are payday lenders regulated? 💸

Payday lenders who are licensed must comply with responsible lending laws. Albeit they will apply a simpler approach to affordability than a larger lender will. In essence, if they believe someone won’t have the means to pay back the loan or that it could tip them into substantial hardship, they are not supposed to loan them money.   

In our experience, many of our clients come to us with more than one – and in most cases, several – debts to payday lenders. It’s more common than not that someone who is struggling financially will have multiple payday loans because they are trapped in a debt spiral (more on that below). 

However, many payday lenders are not licensed and therefore are unregulated, operating outside of the rules governing lenders under the National Credit Act and National Credit Code. This means unlicensed providers are lending people money without checking whether they can pay it back or not, and do not conduct credit checks or provide external dispute resolution. This means unlicensed providers are lending people money without checking whether they can pay it back or not, and do not conduct credit checks or provide external dispute resolution.  

Late in 2022, the Federal Parliament passed Financial Sector Reform Bill 2022. These new laws mandate that payday lenders and consumer lease providers cannot take more than 10 per cent of a person’s net income for loan repayments. Also included in these regulations are rules around predatory marketing and unsolicited communications. Further, previously, lenders might have changed the remaining interest on a loan in the borrower pays it back early but now this isn’t permitted. 

What fees do payday lenders charge? 🤑

While it might seem like a quick fix, a payday loan comes with a lot of fees. Payday lenders can charge you: 

• Establishment fees: maximum fee is likely to be 20% of the amount borrowed  
• Monthly fees: maximum fee per month is 4% of the amount borrowed  
• Default fees: charged if you don't make a repayment by the contract due date — the maximum you can be charged if you default is double the amount you borrowed    

Most payday lenders charge the maximum establishment fee of 20% of the amount borrowed and a monthly fee of 4% of the amount borrowed.  

For a $2,000 loan, that's a $400 establishment fee and $80 for the monthly fee. To pay back a $2,000 payday loan over one year, your total repayments will be about $3,360. That's $1,360 more than you borrowed – almost 70% on top of the original amount. Considering these implications, the lure of quick cash doesn’t seem like such a good idea. 🤔

MoneySmart has a helpful payday loan calculator to help you understand repayments and fees. Under the law, there's a cap on most payday loan fees. If you're charged more than the maximum fee, get free legal advice on how to get your money back.  

What are the biggest problems with payday lenders? 🤔

Repayments on a payday loan are typically made using a direct debit payment to coincide with the borrower’s wage cycle.  

There’s a risk that these repayments make up a large chunk of a person’s income, which means there is little left over to meet essential costs like food and rent. In some cases, if you need cash to pay for living expenses and, after you’ve paid the bills don’t have enough to meet payday loan repayments, you may be caught short and this could mean taking out another payday loan to cover everything, leading to a dreaded debt spiral.  

Payday loans are also pushed via marketing and advertising towards people who are vulnerable and are struggling financially. These promotional campaigns are being replicated by wage advance companies too, which mean that people who feel they need cash fast are more likely to take out credit rather than seek information about less risky (i.e., expensive) alternatives.  

What is the difference between a bank (or personal loan) and a payday lender?  🏦

People usually take out a personal loan for bigger expenses like a car, holiday or something associated with their house. These usually have a longer repayment period and lenders charge interest on these. They can also attract fees and can be secured by an asset (such as a car) or unsecured.  

Payday loans can be bigger or smaller, have a shorter repayment period and as mentioned, they incur fees but no interest.  

How are payday loans different to wage advance products? 🤷🏻‍♀️

They share similarities, but basically the difference is that payday loans are regulated as credit and wage advance products are not – however, in reality both are forms of credit. As mentioned previously, payday lenders are now obligated to check whether someone can pay back their loan, whereas wage advance providers do not need to do this. 

How safe are payday loans? 💰

There are significant additional drawbacks to payday loans. For example, some lenders engage in aggressive collections tactics. Even though consumers have some protections against such behaviour, it’s a stressful and unpleasant experience. 

What’s more, many consumers find themselves trapped in a debt cycle after taking a payday loan. If your current income is insufficient to meet your outgoing expenses, adding loan repayments and fees on top is only going to lead to bigger problems next month. It’s really easy to find yourself in the situation of relying on payday loans while simultaneously being unable to afford repayments. 

What are the alternatives to payday loans? 💵

There are plenty of other options to payday loans for you to consider. We would recommend looking into other options before signing on to another debt.  

Giving yourself options is empowering. Instead of falling into the payday loans trap, you can look for alternatives.  

Understanding the amount of money that you have going in and out of your accounts is a good place to start. This gives a sense of where you can make savings. It can help to get someone to help you to figure out where you might be able to cut down on spending to make those all-important savings.  

The best way to stay money smart is to save whenever and however you can. When you save up for things you really want and make wise choices, you're becoming a money master. Plus, you won't have to worry about becoming vulnerable to payday lender traps.  

It’s understandable that if money is tight and a big expense suddenly comes up, getting a short-term, easily accessible loan can seem like a good solution. Ultimately, there are better ways than payday loans to access money when you need it. If you’re struggling to pay for essentials like food or electricity, accessing community support services or talking to service providers about hardship provisions can help see you through a hard time without adding to the problem. 

If you’re feeling overwhelmed by payday loan repayments, visit the National Debt Helpline website for help on how to repay your payday loans.  

We also suggest getting in touch with us at Way Forward if you’re struggling to meet your debt repayments as we may be able to help.  

So, considering all of this, the next time you hear about payday lenders,

💡Remember they might seem like a shortcut, but they're more like a trap that leads to a maze of problems.

You deserve better!💪🏻

Save your money💰, make smart choices💡, and ask for help when you need it. By doing these things, you're already becoming a true money superhero!  💸🦸🏻‍♀️