And if so, How and Why?

Rapid Finance on 29 May 2015

Payday loans are exactly what they sound like - they’re short term unsecured personal loans that act as an advance on your weekly or monthly pay packet. They can act as a useful bridge if you have immediate costs, like unexpected medical bills, which have to be paid before your wage comes in.

Or at least, that was their traditional function. These days, things are different - and not necessarily better...

How did payday loans get a bad reputation?

The traditional payday loan has morphed into something longer-term. Rather than lasting the two to four weeks between pay packets, they can now often run for 12 months plus. They often carry large establishment fees and ongoing management costs.

Payday loans often carry large establishment fees and high ongoing management costs.

That said, payday loans can still be very useful when used sensibly (eg; paid off within a month or two). They’re only a massive problem when usage becomes habitual - such as, taking out a succession of smaller payday loans instead of a long-term one, or letting one run for longer than a month or two. Unfortunately, people who fall into this category may find this hinders any future application for longer-term finance.

Can payday loans hurt my chances of getting other finance?

Because payday loans were originally designed as micro loans, they are often approved fairly quickly, the short-term nature and looser lending criteria of these loans can often raise red flags with other lenders. Some may also interpret repeated use of payday loans as a sign of poor financial management skills.

The other downside to payday loans is that they are not considered referable credit - so a good payment history won't help you get larger personal loans in Australia. In addition, payday loan payments can kill affordability; if you're paying $250 a week in repayments, lenders may be unlikely to decide you can't afford to pay back an additional loan, until all your payday loans have been repaid in full.

Are they really so bad?

doctor medical

Not necessarily.

Payday loans have helped save lives by providing funds for emergency medical treatment and are often used to cover funeral costs. So a payday loan that’s well-managed is nothing to worry about and can provide vital access to funds when the unexpected happens.

Are there less risky alternatives to payday loans?

credit card option

If you’re not facing a situation as sudden as unexpected injury, illness or death in the family, then you may be better off looking for a new credit card facility. Banks are also often happy to offer a small overdraft to customers with a good credit history.

If you have equity in your home, you may even be able to refinance your mortgage to cover larger, less urgent costs.

Still in doubt? Call the experts.

With over two decades of experience assisting our clients obtain finance, Rapid Finance are experts in finding the right type of finance for your situation. Call us today, and we may be able to find a suitable alternative to a payday loan for you.

Call 1300 467 274 to discuss your situation today.