Is a Payday Loan right for you?

Finance commentators are quick to condemn payday loans but their popularity means they are obviously filling a market need that is not being serviced by the banks or other financial institutions. A Payday loan's appeal to many people is speed and flexibility because individuals may be able to borrow cash relatively quickly even with adverse credit history. This opens the doors to a consumer group that traditional loan providers often neglect. The rise in payday loan popularity has caused a boost in the number of new entrant loan providers into the market. With so many payday loan providers in the market and so many credit alternatives, what criterion should you look at when considering whether one is right for you?

How Payday Loans compare with Credit Cards:

Credit cards and payday loans both enable people to purchase products and services on credit - without using their own money. However a perceived advantage that payday loans have over credit cards is the speed in approval and delivery. Many short term lenders advertise that they may approve applicants and have money in their bank account on the same day or within a several days. Credit cards can sometimes take weeks to be evaluated and if approved then delivered. For people with a poor credit rating, the options for getting credit are significantly impaired and short term lenders provide an alternative.

Credit cards may be more suitable for those who want to use it continually - although this isn't essential - it is possible to only use a credit card sporadically. Importantly, it is usually only those who posses a good credit rating who can be approved for a credit card. The benefit with some credit cards is that if you pay your balance in full before the interest free period, you will avoid paying any interest. Unfortunately there is no way to avoid paying the fees for a payday loan - it's locked in and you agree to it before you get the money. Because of the high fees and the short term nature of the loans, payday loans should not be continually relied on and should be used extremely carefully.

How Payday Loans compare with Personal Loans:

Personal loans are very similar to more traditional loans - and once again for most banks if you have a poor credit rating or no credit rating, personal loans are normally not an available option for you. Personal loans are usually structured for the long-term, with payments being scheduled over a few years. So if you do not want long-term debt, then it wouldn't make sense to go into a multi-year agreement.

If you want to look at payday loan providers here are some ideas to build a framework when comparing providers. On MoneyBuddy we list a lot of lenders, but we don't list every product in the market. Also keep in mind that when comparing products on this website, we may not include all the features for comparison.

Loan fee:

In simple terms, in Australia the maximum allowable fee is 20% of the credit amount and a monthly fee of 4% of the credit amount. Some lenders may choose to offer lower fees than this, but none can offer higher fees.

Loan length:

Short term loans by definition are from 1 to 12 months.

Time it takes for the loan to be transferred:

If approved, payday loan customers may have their cash loan in their accounts within several days and sometimes even on the same day - this of course depends on the lender and various criteria they set.

Additional fees:

Ensure you read all the terms and conditions because payday loans come with strict conditions. If you miss a repayment then most lenders will charge you a hefty fee, so go into any financial arrangement with eyes wide open about potential fees. Especially if things don't go according to plan.

Refinancing:

Refinancing of payday loans is no longer allowed in Australia. If a customer repays their loan they may be able to apply for a new loan in the future once all existing short term loans are paid and up to date.

Conclusion:

Payday loans provide a service for those who are in urgent need of some cash for the short-term but it can be financially crippling if it becomes a service that you repeatedly use and rely on. Like any loan, do your research to know if it is the right option for you.

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