A payout before payday, now that sounds nice, but at what price?
Also called a payday advance, payday loans are very short term, unsecured loans that are offered at a high rate of interest by businesses rather than banks.
As the name suggests, the money is usually urgently required in advance of the borrower reaching payday, at which time the lender expects the repayment to be made. Some companies require borrowers to have previous payroll and employment records in order to approve the loan.
Already common in places such as England and the USA, payday loans have attracted increasing interest from Australians over the last five years. Local online searches for payday loans hit over 60,000 in a single month last year, while companies already offering the service have seen a rise of almost 6000 per cent in the past three years.
One of the major benefits of payday loans is the instant access they provide – often depositing the required amount into the borrower’s bank account within minutes. Users often call upon this type of loan for urgent needs such as paying an overdue bill or during particularly expensive times such as the build-up to Christmas. By having access to a short-term loan for a relatively small amount that will be paid back immediately, borrowers can avoid getting into long-term debt.
Payday loans have extremely high interest rates, often up to 400 per cent. The problem with this type of loan comes when the borrower reaches payday and finds that they cannot in fact repay the amount they have borrowed. Payday loan companies often consider borrowers regardless of their credit rating, offering instant online approval and allowing people to borrow far more than they can feasibly pay back. Some customers then realise they cannot meet their monthly expenses and find themselves taking out multiple high interest payday loans, resulting in a vicious cycle of debt.
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Is a payday loan right for you?
Always consider your personal circumstances. It is often best to avoid high interest loans in favour of similar services offered at lower interest rates by credit unions or banks. If you do not have a stable or substantial income, avoid getting yourself into debt – especially with the high interest rates of this type of borrowing.
However, if you are simply in need of a short-term loan and can be certain that you will be able to pay it back upon receiving your next paycheque, take the time to research the best payday loan for you.
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