With the Royal Commission into banking underway, getting a loan approved isn’t as easy as it used to be. Unfortunately, shonky lenders have seized the opportunity to fill the gap in the market, and payday loans are easier to find than ever. Offering fast cash with minimal paperwork, they might seem like the solution to your cashflow ills, but scratch the surface and you’ll uncover a very different reality. Here are the potential pitfalls you need to know. Let’s start with the basics – what is a payday loan? Payday loans are short-term, high-cost loans. They include small loans – i.e. $1000 to $5000 – as well as larger loans (up to $10,000) borrowed over longer periods.  They’re usually repaid via a direct debit from your bank account or deduction from your pay, most often on the day you’re paid. They also include retail (clothing) offers that enable you to make immediate small purchases on interest free credit without a credit card. What are the associated fees and charges? As with any loan, payday loans include a range of fees and charges. They’re capped by the Government, but vary from lender to lender depending on the amount you borrow. You can’t be charged interest on the loan, but depending on the credit provider, you can legally be charged:
  • A one-off establishment fee of up to 20% of the total amount loaned
  • A monthly account keeping fee of up to 4% of the total amount loaned
  • Government fees and charges
  • Default fees and charges of up to 200% of the total amount of the loan if you miss any repayments
  • Enforcement expenses in the event you fail to pay back the loan
What are the hidden costs? With a payday loan, you’ll certainly get your money in a hurry. But you should also know that if you take one out (or even make an enquiry or application), it will be noted on your credit file. And this can have serious long-term consequences. Everything from the amount you’ve borrowed (or sought to borrow), the terms of the loan and details of your defaults and payments are viewable by other potential lenders. As a general rule, if you have obtained, enquired about, or applied for a payday loan in the past 6 months, you’ll find it difficult (if not impossible) to obtain finance from many other lenders – even if it didn’t affect your actual credit rating. Throw in unreasonable repayment periods and fees and charges and you could find yourself in over your head very quickly. The upshot Payday loans aren’t what they’re cracked up to be, so unless you’re absolutely desperate for cash, we think it’s best to steer clear. If you have questions about getting finance approved, as always, give us a call. We’ll guide you through your options and will help find the best solution for your needs.