How Do Payday Loans Work?
When you’re in a financial bind and need quick cash, you might consider a payday loan. Payday loans can offer a fast, short-term solution for when you’re faced with life’s little emergencies. But how do payday loans work? While they can be convenient, they can come with high fees and strict repayment terms. Before deciding whether a payday loan is right for you, it’s important to understand how they work, their risks, and possible alternatives.
Overview:
- What is a payday loan?
- How do you use a payday loan?
- Are payday loans a good idea?
- What’s better than a payday loan?
What is a payday loan?
In Australia, there’s often a lot of confusion around payday loans and what they are. The Australian government refers to payday loans as short-term loans of up to $2000 with a repayment period between 16 days and 12 months. These loans are also called small amount credit contracts (SACC).
The broader more generalised use of the term ‘payday loans’ includes short-term loans of $2001 up to $5000 with a repayment term between 16 days to 2 years. These are classed as medium amount credit contracts (MACC)
To help cut the confusion, we’ve broken down the two types of short-term loans commonly offered as payday loans:
| Loan amount | Repayment period | Allowed Fees & Charges | Exceptions |
|---|---|---|---|
| $2,000 or less (SACC loans) | 16 days – 1 year |
|
Banks, credit unions, and ADIs are not subject to these caps. Does not apply to credit cards or continuing credit contracts. |
| Up to $2,000 | 15 days or less | Banned – Lenders cannot offer short-term loans with a repayment period of 15 days or less. | Banks, credit unions, and ADIs are exempt. |
| $2,001 to $5,000 (MACC Loans) | 16 days – 2 years |
|
None |
Are payday loans legal in Australia?
Payday loans are legal in Australia. However, they are strictly regulated by the Australian Securities and Investments Commission (ASIC) under the National Consumer Credit Protection Act 2009 (NCCP Act). Lenders must have an Australian Credit Licence and follow responsible lending obligations. If a lender does not comply with these laws, they can face penalties, and borrowers may have grounds to dispute unfair loan terms.
How do you use a payday loan?
Generally, payday loans are used to cover small short-term expenses, such as:
- Emergency costs, like medical bills or urgent car repairs.
- Rent or utility bills when cash flow is tight.
- Unexpected travel costs.
How to apply for a payday loan
Each lender will have their own application process and eligibility requirements, but typically, applying for a payday loan includes:
- Filling out an online or in-person application.
- Providing proof of income (such as payslips or Centrelink statements), identification, and creditworthiness.
- Supplying bank account details for direct deposit and repayments.
- Agreeing to the lender’s repayment terms, which are usually automatic deductions from your nominated account.
Approval times vary, but many lenders offer same-day or next-business-day funding if the application meets all requirements.
Are payday loans a good idea?
Whether a payday loan is a good idea depends on your personal and financial situation. A payday loan might be a suitable option to consider if you:
- Have an urgent, unavoidable expense.
- Are confident you can repay the loan on time.
- Have exhausted other lower-cost borrowing options.
A payday loan may not be a good option if you are already struggling with debt or need a long-term financial solution rather than a short-term solution. There are other options that may be more suitable for your situation. This includes other types of emergency loans that could help you access cash quickly in Australia.
What are the disadvantages of payday loans?
While payday loans can provide quick financial relief, they can come with significant downsides, including:
- High costs: the fees and interest rates can be significantly higher than traditional loans.
- Short repayment periods: payday loans have limits on repayment periods, so repayment amounts will be higher.
- Debt cycles: borrowers may take out additional loans to cover old ones, leading to a cycle of debt.
- Credit impact: failure to repay a payday loan on time can negatively affect your credit score and result in collection actions and defaults.
- Irresponsible lenders: some lenders do not sufficiently practice responsible lending and may fail to adequately assess a borrower’s ability to repay, putting the borrower at risk of financial distress.
Read more: Pros and Cons of Payday Loans
Are payday loans bad for your credit?
Depending on how you manage them, payday loans themselves do not necessarily harm your credit score. However, if you fail to meet repayment obligations, you may have issues like:
- Default listings on your credit file, which remain for up to five years.
- Increased difficulty obtaining future loans, including home and personal loans.
- Debt collection actions, which can further damage your financial reputation.
If repaid on time, payday loans may improve credit scores if the lender reports repayment information to credit agencies.
If you’re struggling with debt, financial counseling services like the National Debt Helpline (1800 007 007) can provide free assistance.
What’s better than a payday loan?
If you need quick cash but want to avoid the high costs of payday loans, these are some alternatives to consider:
- Borrow from trusted friends or family members: ensure you both have a clear understanding of expectations to avoid any upset with your loved ones.
- Earn extra money: try earning extra funds by doing odd jobs on apps like Airtasker.
- Using a credit card: always use any credit card with caution, as fees apply and spending can get out of hand easily.
- Credit union loans: Many credit unions offer small personal loans with lower fees and interest than payday loans.
- Payment plans: If you need money for bills, utility providers and some service providers offer payment plans to help manage costs.
Before committing to any option, it’s important to assess your current circumstances and how your future goals may be impacted. If you’ve checked out all the other alternatives and believe a payday loan is the way to go, then make sure you choose a reputable lender, like Swoosh, and read any terms and conditions carefully.
Considering a payday loan? Swoosh is here to help.
Looking for fast, easy online payday loans from a responsible lender? Swoosh has you covered with payday loans from $2,200 to $5,000. We’ll get you the cash you need, when you need it!
FAQs
How long do you have to wait to get another payday loan?
There is no official waiting period between payday loans, but responsible lenders will assess whether you can afford another loan before approving it. If you already have multiple payday loans, lenders may be less likely to approve additional borrowing.
How can I borrow a small amount of money instantly?
To borrow money instantly, look at fast online loans such as same day loans, payday loans, emergency loans, and quick cash loans. However, it’s important to consider fees, interest rates, and repayment terms before borrowing.
It may also be a good idea to check if any close friends or family would be willing to lend you the funds. If you do borrow money from a loved one, remember to have honest and open conversations about expectations to avoid any upset down the line.
Is Afterpay a payday loan?
No, Afterpay is not a payday loan. It is a buy now, pay later (BNPL) service that allows consumers to split purchases into interest-free installments. However, missed payments can result in fees, and frequent use can lead to financial strain.
Read more: Does Afterpay Affect Your Credit Score?
What is the maximum interest rate for a payday loan?
Generally, payday lenders offering SACC loans cannot charge interest in Australia. Instead, they charge fixed fees including:
- A 20% establishment fee.
- A 4% monthly fee.
- Late payment fees if repayments are missed.
What is the difference between a cash advance and a payday loan?
Payday loans are short-term loans from non-bank lenders, with fixed fees and strict repayment schedules. Cash advances are typically funds withdrawn from a credit card, usually with a higher interest rate additional fees.
