Payday Loans Pitfalls | The Problems with Payday Loans

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Payday Loans Pitfalls

Small-amount credit contracts, commonly referred to as payday loans, come with an array of pitfalls.

Nifty Loans will discuss payday loan pitfalls, and why a personal loan may be a more suitable option for you. Payday loans are typically short term loans with high interest.

Payday loan problems

Payday loans are a credit option many Australians turn to when they need fast cash. They are short-term loans, with a short repayment period and high-interest rates. Payday loans are often approved within minutes, so they can seem like a great option for people desperate for cash.

However, payday loans technically do not exist. They are now called “small-amount credit contracts” (SACCS), but are still colloquially referred to as payday loans. 

What are payday loans?

A payday loan Australia is a high-interest, short-term loan. They often have short repayment terms; usually around 4-weeks.

Payday loans are typically repaid by:

  • The lender sets up a direct debit from your bank account, or;
  • A portion of your pay automatically being deducted each pay cycle.

It is not uncommon for people that take out payday loans to end up owing double the original loan value. This can end up leaving the borrower in a worse financial position than they were beforehand.

Key payday loan pitfalls

There are a lot of issues associated with fast payday loans, including payday loan debt problems. These will be listed and discussed below.

Lack of responsible lending associated with payday loans

Perhaps the most dangerous pitfall is the accusations of irresponsible lending practices. The industry has a reputation for preying on vulnerable individuals. This may be true for some lenders but cannot be generalised to suggest that all small loan providers are bad.

No credit check payday loans

Many payday lenders offer borrowers ‘no credit check loans’. However, these lenders should be avoided as they are not adhering to responsible lending guidelines. Credit checks allow lenders to collect vital information to decide whether a loan is manageable for the borrower. This is to avoid the person overborrowing and incurring unmanageable, unaffordable debt. Alternatively, you could consider a bad credit loan from Nifty Loans.

Legal requirements for short term loan approvals

ASIC requires lenders to conduct thorough, reasonable inquiries into an applicant’s financial situation and reason for the loan before approving their application. This is to ensure that the information provided is accurate and correct and to avoid an applicant overborrowing. Small amount lenders must consider and adhere to the following:

  • At least 90 days of bank statements must be obtained. This allows for accurate verification of income, spending and how the customer currently handles money.
  • For Centrelink customers, no more than 20% of their income can be spent on short term loans.
  • If a customer is struggling to make repayments and defaulting on current short term loans, this can demonstrate the individual is currently in financial hardship and an additional loan would create further pressure.
  • There is also a presumption of hardship if a customer has received multiple short-term loans in a short timeframe. 

Alternatives to payday loans

If you are in need of a credit solution to fill a short-term cash shortfall, there are other options at your disposal that may be less costly than a payday loan. 

Contact your utility providers

Most utility companies have hardship options for customers struggling to manage their finances. You may be able to negotiate alternative payment options, including paying in instalments. If you feel you are unable to pay your electricity, water or gas bills, contact your provider before taking out credit.

Apply for an advance payment if you receive Centrelink

If you receive government benefits, you may be able to receive an advance payment. This is an advance on your future payments which is to be repaid out of your future Centrelink payments without incurring interest.

No Interest Loan Scheme (NILS)

NILS loans are set up for low-income earners to cover expenses up to $1,500. These loans are only able to be used for designated purposes, including essential items or urgent medical treatments.

Personal Loans with Nifty Loans

If you are in need or urgent financial assistance and cannot utilise any of the payday loan alternatives suggested above, you may wish to consider a personal loan with Nifty Loans. Nifty Loans offers same day cash loans from $300 to $10,000, 100% online. We are one of Australia’s fastest-growing small lenders and specialise in delivering fast cash loans. We often process our applications within just 60-minutes* and support instant transfers on approval, meaning you could have your cash within 60-seconds* of approval.

To clearly visualise the difference between a personal loan and a payday loan, we have compared our personal loans with the average payday loan.

Nifty Loans Traditional Payday Lender
Loan Amount $300 to $10,000 $2,000
Loan Terms 6 to 24 months 4 weeks
Hardship Support Yes Yes
Online Yes No
Same Day Approval Yes Yes

It is clear that Nifty Loans offers the same benefits people turn to payday loans for, without the troubling interest rates and unmanageable repayment terms. We also offer bad credit loans to eligible borrowers. We adhere to the responsible lending guidelines by ASIC and conduct credit checks and financial analysis of all of our applicants, to avoid overborrowing and creating financial hardship.

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Andy Andy

AUTHORITATIVE SOURCE

Andrew Bell

Since founding Nifty in 2016, Bell has continued to make waves within the local financial sector for his continued ambition and willingness to adopt emerging technologies.

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