First thing and the most important thing to note is that I do not recommend ever using a payday lender. If you need a small loan quickly to pay bills or for cash flow, then you will not look attractive to a mainstream lender when the time comes that you need one. It may be tempting to get the ‘quick cash loans’, however you will need to tread with caution for many reasons. The main reason would most definitely be the huge fees and high interest rates that are associated with them and the strict terms of payment that usually are deducted on the same day of your pay check or the day after.
In 2013, short term loans (loans that are less than 16 days) where in fact banned in Australia, now most pay day lenders offer longer terms that are just as costly and, in most cases, go for round 7 weeks. Although these loans can be tempting and are so easy to apply for and be approved, such as over your phone or a quick internet application (sometimes even with multiple credit defaults against you ), they are very expensive and all so often get consumers into loads of serious financial trouble.
Under Australian law, an unsecured loan for $2000 or less for a term of at least 16 days but less than one year from a loan company are now called Small Amount Credit Contracts (“SACC”). These loans have been subject to special rules since mid 2013.
These SACC loans have a limit as to how much that can be charged, however they are still expensive compared to other financial loan products.
The usual costs are:
- An Establishment fee of 20% of the amount loaned
- A monthly fee of 4% of the amount loaned (monthly @ 4% means an effective annual rate of a whopping 48%!!)
With a normal loan the amount of interest you are charged is paid back as it offsets over time as you only pay your interest on the principle outstanding. With a SACC loan, the monthly fee applies to the whole amount you originally borrowed regardless of how much of the loan you have already paid back to them.
If we work it out with all the fees, charges and interest depending of course as to how long you take the loan out for, but its usually around 100% to 500% per annum!! This is ridiculously high even if you compare it to advancing cash out of a credit card! These guys are essentially ‘Sharks’ disguised as clownfish!
Then if you are late in making the repayments they can also charge, enforcement costs, collection fees and default fees.. wow!
Now with all of that in mind, I have not even begun to tell you about the adverse credit ramifications of using a payday lender.
Even if you are not late in making your repayments, there are other significant adverse effects of using a payday lender. They include;
- The credit enquiry itself, reduces your credit score heavily as these loans are considered high risk loans. If you use these SACC loans regularly you will almost definitely have a low credit score because of this making it impossible to transition into the mainstream lending market. Please understand that these credit enquiries will stay on your credit report for 5 whole years. This is a long time in credit years, even if you are not approved, they will still show up!
- The repayments that are direct debited from your transaction account will come up with the name of the payday lender, this will appear in the eye of potential serious lenders that you are living beyond your means if you have had to resort to such high rates for small unsecured finance.
- If you are unfortunate enough to get a credit default with a payday lender often we can remove them, however this is an extra cost to you along with the debt and fees and interest you have paid to the loan. Just by making the payment after a credit default has been listed does NOT automatically remove the entry. If just gets updated to a PAID default and still hangs out on your report for 5 years from the date of the listing.
The ideal that credit repairers will be able to wave a wand and magically make all of these entries disappear is not always possible as in most cases the reality is these listings will stick around and haunt you for years to come.
We Fix Credit can give you the best chance possible to repair your credit, however prevention and responsible credit report management by careful consideration before making short term unsecured loan application is the safest way to ensure your credit score keeps looking handsome.