Need money in a hurry? You may be tempted to take out a payday loan.
You might think you’re not eligible for a better deal or you may not know what else is available. Check out
all your options first, though, because the interest charges and fees on these kinds of loans can be
extremely high – and there may be a cheaper alternative.
How do payday loans work?
A payday loan is a short-term loan, made to you as a cash advance against your next pay cheque.
Loans are usually for a few hundred dollars, to be repaid on a set date – usually in two to four weeks
(depending on whether you get paid fortnightly or monthly). You will probably have to authorise a direct
debit repayment from your bank account, which will be deducted when your next pay cheque comes
Credit providers typically charge a set-up fee (often called an 'application fee', 'draw down fee' or
'establishment fee') plus a fee each week until the loan is repaid. Fees vary depending on the term of
the loan. If you fail to repay the loan on the due date, you will usually be charged significant default
fees and/or a very high rate of interest until you repay it in full.
Such credit providers may take a direct debit over your bank account to make sure you make your
repayments. If you do not have any money in your account on the due date, you risk being charged
fees by your bank and the credit provider.
If you compare all these fees to the interest charged on other types of loans or credit cards, payday
loans can be a very expensive form of credit. By law payday lenders in the ACT, New South Wales,
Queensland and Victoria are not allowed to charge more than 48% interest. There is no interest rate
cap in the other states and territories. If you think you have been charged too much, complain to ASIC.
(See details of how to do this on page 4.)
Payday loans and other high-cost credit
What about high-cost personal loans?
If you want to borrow a small amount (less than $500