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The Lowdown on Payday Loans

Updated: Feb 5

The increased prevalence of payday loans is not surprising given the unpredictable nature of the modern job market and the rise of the ‘gig economy’. The number of payday lenders has risen significantly in recent years. However, payday loans aren’t always the most appropriate financial tool and it is important that you understand all of your options before deciding on a loan.

Payday is the day - usually weekly, fortnightly or monthly - on which your wage is paid into your bank account. The payday in payday loan simply refers to the fact that the loan is usually required to be paid back on your next payday. As payday loans are usually small cash loans intended for emergencies and unexpected bills, the term of the loans usually range from 16 days to 1 year.

While these terms will sound familiar to anyone with a personal loan or credit card, payday loans are usually easy to discern by their high interest rates and quick turnaround.

Payday loan or personal loan?

While payday loans and personal loans are both viable means of securing the money to fund an investment, a payday loan can be applied for and reviewed within 24 hours, meaning it can be the perfect option for those who need quick cash. Also, a payday loans application is generally less involved than a personal loans application, as the amount being lent is usually significantly less than a personal loan. Payday loans are typically for an amount of money under $2000, however nowadays it is not uncommon to see payday lenders offering up to $5000.

Although payday loans aren’t inherently “bad”, they should be approached with a high degree of caution as the large fees and penalties involved can trap borrowers in debt cycles. Ie. Borrowers can end up having to take out a second payday loan to pay off the first.

Which loan should I choose?

Unless an emergency or unforeseen expense threatens to destabilise your finances (and to be frank, potentially your life), a payday loan may not be the option..

Most people need to borrow money at some stage in their life, whether it be to fund a wedding, home renovations, or a much-needed holiday. In these situations, a low-interest personal loan is a far better option than a payday loan. For starters, a personal loan can provide anywhere from $1000 to upwards of $50,000. The loan repayments are usually over a much longer period (12 months to 5 years) and you can choose a loan which allows you to repay early without being penalised. If you’re considering applying for a personal loan, using a comparison rate tool will allow you to check the combined expense of one loan in comparison to another. This is a very important step in deciding the most appropriate loan for your circumstances.

For those with low or bad credit, a fast payday loan might be the only option available as the application process does not subject the borrower to extensive credit checks. However, if you have had trouble paying bills or making loan repayments in the past, we would generally advise against incurring further debt at such a high rate of repayment.

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