Typically, the holiday period is a time of year where people spend the majority of their money and increase their debts.
Come the start of the new year, many people can find themselves struggling with that additional debt burden and often turn to short-term, payday loans to try and help them get by.
What is a payday loan?
A payday loan is a short-term loan for small sums of money that, more often than not, need to be paid back quickly.
Frequently, payday loans are up to $2,000 which are then to be paid back by your next payday, hence the name. There are also payday lenders that let you borrow up to $5,000, with longer loan terms.
These loans are usually backed by the fact that you have some form of income and can pay them back within weeks.
When a loan application is approved with a payday lender, you will generally receive the funds within a few hours.
Costs of Payday Loans
Payday loans often come with some of the highest costs of any loan type, which is due to a number of factors.
Firstly, the amounts are small and are repaid quickly – payday lenders are not able to charge interest on small loan amounts.
Secondly, those applying for payday loans generally have poor credit ratings and are not always able to get finance through traditional means.
According to ASIC, payday lenders are limited in what they can charge on loans under $2,000 and come with these terms:
– a 20% loan establishment fee
– a 4% monthly account keeping fee
– a 200% fee for defaults
– a Government fee
– expenses, if the lender needs to take a borrower to court
Will a Payday Loan Impact My Credit?
All lenders will examine your credit score, which is effectively your track record of paying off debts in the past.
They will also assess the types of debts you currently carry, as well as how they impact your disposable income.
A lender wants to know that you are someone who manages money well and if you’ve been using payday lenders to get through when money gets tight, this might not be something that is looked on favourably by banks.
If you are wanting to get a home loan in the future, it is worth creating a budget to ensure you don’t need to use payday lenders to pay bills for a number of months before applying for a loan or even seeking pre-approval.
If you’re struggling with debts, talk to a mortgage broker and find out how consolidating your debts might be another way to better manage your current debts, rather than take on more.