Payday Loan: a very short-term loan whereby the borrower agrees to repay the loan (and interest) when they receive their next paycheque.
Who Typically Uses a Payday Loan?
A person who utilises payday loans is likely doing so to cover an unexpected or unplanned expense that they cannot make with the current cash they have or are able to access. Since they will not have the required funds until they receive their next paycheck, a payday loan is used to fill the gap.
Realistically this situation can occur to almost anyone, although typical users are those that are financially stretched and do not have access to credit cards or a savings account.
What Can Go Wrong with Payday Loans
A payday loan seems like a great way to get quick cash, and it can be. However, they should be used responsibly as there is one major catch. You’ll be paying a very high interest rate to access the funds. Worst of all, if you are unable to pay the money back using your next paycheck, the borrowings will roll over and rack up even more fees. This scenario can quickly spiral out of control.
A Payday Loan Example
Day One: You Take Out a Loan.
Your car breaks down on the way to work. You can’t make the payment, so you take out a $1000 payday loan to get back on the road.
Two Weeks Later: Interest is Added.
You will be charged $14 per $100 lent. That is $140 in interest that you now owe, taking the loan to $1140 – that is 364% interest annually!
One Month Has Passed: A Finance Charge is Added:
You cannot pay the loan. The loan rolls over to a new period with a finance charge of $160 – you now owe $1300.
Two Months Later: You are Sent to Collections
If you miss any payments, you run the risk of being sent to collections. This action may severely damage your credit score, and your wages could be impacted by your employer as well.
What Can Substitute Payday Loans
- Get a credit card with a lower interest rate. If possible, it may be a better option to get a credit card. The interest rate will likely be a lot lower – with the average rate in Australia hovering around 17%. Always make sure to pay off any debt as soon as possible, avoiding interest whenever possible.
- Accumulate savings. Take control of your finances and do your best to build an emergency fund proactively. Ideally, the size of your savings should be three to six months of your usual expenses.
- Find an employer offering Paytime app, an Earned Wage Access app that allows employees to access their earned wages before payday, even on a weekend. Employers realise that the financial wellbeing of their employees impacts their engagement at work. If your employer partners with Paytime, you will be able to have early access to your earned pay whenever you need, not just when payday arrives.
If you want to get paid on the same day you work and improve your financial wellbeing, workplace engagement and productivity, contact Paytime today to have our team reach out to your employer and have it implemented!
