Let’s begin this article with a clarification of what ‘Payday loans’ are. Payday loans are short-term loans that usually have a pay-back period of 2-4 weeks, in other words, on your next pay day. They are frequently used by individuals who have experienced an unexpected bill which has not been accounted for in their budget planning. This bill may have arisen due to an accident, health issue, or a broken asset. Whatever the cause, unfortunately, these life curveballs cannot be predicted and with many individuals living pay-check to pay-check (6m Australians) or having their savings tied up in investments and in family commitments, they cannot pay the bill until their next paycheck. Therefore, they innocently take out a payday loan as they believe it will be of genuine assistance. This is not the case.
At Paytime, our core mission is to make a positive impact on the financial situations of individuals. We appreciate that employees are more than simply a worker – they are a family member with personal lives and financial burdens. To assist you in making financially safe decisions, we have outlined the disadvantages of taking out a payday loan and an alternate solution you can provide to your employer – or seek out in your current or future employment contract.
It’s easy to understand the attraction of payday loans – you have access to the amount of money you need in an instant and it seems as though your financial troubles have been cured. However, this is exactly the ‘payday loan’ trap that creates the debt spiral so many have experienced. Payday loans are instantaneous, but the instant cash flow does not come without great risk and a greater cost.
The fees on payday loans are much higher than normal loans and the payback period is significantly shorter. The result? Many people find themselves in a situation where they have taken a payday loan but quickly realize they will not have the money to pay back the loan on their next pay day. After all, their normal paycheck covers their budgeted expenses. Now, they have to pay back the loan taken for their unexpected expense, and interest on top. This leaves the majority of individuals taking out an additional loan to pay back the first loan. This is known as debt spiraling, and roughly 15% of payday loan borrowers will fall into a debt spiral, according to data from Digital Finance Analytics (DFA). For clarification, a debt spiral is as it sounds – it is the journey of falling further and further into debt in an attempt to get yourself out of debt. Although it may sound dramatic, the correlation between payday loans and a debt spiral, but when you acknowledge the interest rate is commonly 20% of the amount borrowed + 4% per month, you can understand how quickly debt can creep into one’s life. Hence payday loans being coined as ‘The Debt Trap.’
Debt spiraling and financial stress is directly correlated with the mental wellbeing of individuals. Research in the space has demonstrated individuals with mental health issues are 3x more likely to be in debt – and 46% of people in debt said they battle a mental health issue such as anxiety or depression. The burden of facing debt and being overwhelmed by bills is a leading cause of poor emotional and mental wellbeing. Financial stress impacts all areas of life – such as productivity at work, social battery with friends, energy levels and overall health. To preserve your quality of life and output, be sure to truly reflect on your ability to take on payday loans before signing a contract, and research alternative solutions.
The alternative solution to payday loans
Instead of taking out a loan to get you through to your next paycheck, you could speak to your HR department or manager at work to request Earned Wage Access (EWA). EWA is as it sounds – it enables you to access the money you have earned based on the hours you have worked. At any point in the pay cycle. This eliminates the pressure of waiting for a weekly, fortnightly or monthly ‘pay day’ as you can better budget your finances. The ability to access the money you have worked for as you go relieves financial stress as you have a less volatile cash flow, are financially empowered, and are more equipped to handle unexpected expenses. Plus, adopting EWA is of no cost to employers!