Let me be very upfront here, I am not a fan of payday loans and have some pretty strong opinions on why that is. As an industry, payday loans are positioned as ‘convenient’ and there to ‘help’ you. While they may not intentionally aim to ‘loan shark’, the people who end up taking these loans are often vulnerable and in turn get a bad deal.
As someone who loves to get a great deal on my finances, there is much that is left to be desired about the pay day loan industry as a whole. Here are my thoughts.
You might have seen a TV advertisement for a payday loan in the past, a short term cash advance to ‘help’ you through times of financial shortfall. Often labelled as the ‘smart’ way to get instant access to money, these loans are statistically taken out by people who have requirements to access instant cash, potentially have a bad credit rating or find themselves in a position that leaves them with little else in terms of options for lending.
There are fees, charges and issues you have to be aware of. No matter how well the providers try and package their products, the loans themself are often plagued with moral concerns from my point of view.
Here is a guide to payday loans in Australia.
Payday loans often target the vulnerable
No payday loan vendor will ever admit this. They of course have to focus on been seen as ethical lenders that go through a strict process of ensuring they only lend to people who will repay the loans.
Though the immediate fact that someone would need ‘instant’ money begs to ask, are they not already vulnerable? Are they not already looking for any method possible to get money and in turn will do so at even a negative cost?
Now I am sure there are very smart people out there that use the odd short term payday loan, well aware of the high cost of borrowing and only do so because they have made a judgement call that it is worth it. It might be a trades person who has absolutely no cash but needs to buy a tool in order to get paid. I get this and don’t want to upset those people in this article.
None the less, I believe there are quite a few people out there that are not fully aware of just how bad a deal they are getting and will start an endless cycle of debt coupled with the inability to get ahead financially.
Things to be aware of when it comes to pay day loans
Most vendors will focus on the positive benefits of taking out a loan. This is to make people think about the short term happiness spending can provide. For instance, I looked at around 5 different vendors of payday loans and most would focus on:
- The convenience of the service
- Quick approvals
- Instant payment
- No paperwork
- Specials on your first borrowing to incentivise you to try
Now really quickly, look at those dot points above. No paperwork is a big worry, much similar to ‘low doc’ loans, inadequate paperwork often spells huge issues around the topic of responsible lending. This means people who may not be able to prove their income will be granted a loan, not very responsible if you ask me.
Offering specials on your first transaction, e.g. your first loan of $500 will only cost you $1 say. This is a special to get you to try the service. The reason some may do this, is that once you are a registered member, the access to money and future loans can be fulfilled very quickly either online or over the phone, directly to a debit card they have issued you. This means that although the first loan won’t cost you much, they have effectively got their service deep into your mind and wallet, ready for the next time you want to borrow (and this is when it will cost you).
Remember that debt is a slippery slope. Much like my credit card or personal loan I took out with my bank. I often repay it but am very quick to access it again and often find myself in perpetual debt. Even if you do repay your pay day loan in the timeframe they give you, requesting more money only continues a cycle of not getting ahead. So beware of having a pay day loan debit card in your wallet.
Fees, charges and high interest rates of pay day loans
All pay day loan providers will debate and justify why their interest rates are so high. They too need to make money they say, though at what cost to society I respond?
Instead of focusing on interest rates, which are easy for people to quickly realise might be too high – these providers will instead focus on a set fee per $100 or similar in the hope it might look better on paper (they will argue it is to help others understand what they are in for which does have some benefits).
For example, $25 fee to borrow $100. This may seem OK on face value, though this effectively makes the interest rate 25%. My personal loan is at 9% – a 16% difference.
So by borrowing $100, I am repaying $125. This can quickly add up when someone borrows say $1500. That would be a repayment of the initial $1500 + $375 in fees.
Firsthand experience of predatory lending practices
I have seen firsthand how these payday lenders operate. They gave money to a friend of mine who studies full time and parties equally as hard. This means he is often out multiple nights of the week and before every pay cheque, he already owes the whole packet back to the payday lender.
Because he did this in the first instance, it means he now relies on the card to fund the following fortnight or run the risk of not having money to eat and go out. The majority of the responsibility here is the fault of my friend, though none the less – I am curious why someone on such a low income was able to be approved, let alone allowed to perpetually borrow money. Most of his transactions are completed via his iPhone and late at night so he has extra money to go out with.
It is such a shame to see someone I love and care about so much get into such a bad deal. Each to their own and all that, though the temptation of payday lending is a strong one for many. My friend isn’t the best at managing money, though I know he definitely is smart and knows better. I wonder how others out there go with all this if they had even less money knowledge?
Your experience with payday loans
Do you wish you never took the first loan? Do you disagree with me on the above? Drop us a comment below. Before you do, remember this is just my opinion and I know there are many sides to any story – payday loans included.