Payday lenders make their cash advances sound enticing, easy and sensible. One payday lender claims that they offer a way ‘to avoid outrageous bank fees'. Well, think again!
There are numerous examples of people who have been trapped by escalating debts, which started with borrowings as small as $50. One couple borrowed $50 in a particular year and six months later they owed $980. With the loan outstanding for 10 months the consumers were paying an effective annual percentage rate of 487% for the funds.
Read between the lines
Let us show you why you need to read between the lines. Here are some examples:
- One payday lender says that their ‘payday advance is a fast and discrete way of obtaining an advance of your upcoming wage to help with bills or plans that you just weren't expecting'
Some payday lenders suggest that their service is a way of obtaining an advance on your income, so that you can pay unexpected bills. However, you should be aware that conditions of your loan may include the lender having first call over your pay packet by direct debit. This could mean that you'll have even less money to pay bills or to pay for essentials until your loan is repaid. - Another payday lender says that ‘you must be in full-time or part-time employment, earning a minimum of $450.00 per week after tax'. You must also have been employed for a minimum 6month period with the same employer.
Some payday lenders will only lend money to people who have steady employment with a minimum wage. However, in reality 38% of payday lending customers are on Centrelink benefits. Centrelink has advised OCBA and other Fair Trading bodies around Australia that there is an increase in the number of their clients, receiving benefits, who are borrowing from payday lenders. This means that the payday lender is often accessing unemployment benefits or pensions as soon as they are deposited into the accounts of these people. - A payday lender says that ‘the advances are arranged over one pay period as they are short-term advances'. While this may be the initial arrangement, many people cannot repay the loan within one pay period, so the loan is rolled over…and over, and over. A further period, for an additional fee, often results in an escalating debt.
- Payday lenders will tell you that poor credit ratings don't matter to them because cash advance loans are secured by your paycheque. This may sound an easy way out of your difficulties with finding a lender. But think again. If you have a poor credit rating this may indicate that you have problems with budgeting and managing your money. A payday loan will only complicate your problems.It may be a good time for you to see a financial counsellor or discuss your circumstances with one of the alternative sources of financial assistance listed.
- These are examples of the ‘simple' fee structure taken from one payday lender's website :
Advanced requested $100 Administration Fee $20 Total Repay $120 $200 $40 $240 $500 $100 $600
The ‘administration fees' referred to convert to effective interest rates of 200-300% per annum. Compare that to credit card interest rates which are currently around 15-20% per annum.
Comparing a pay day loan to a credit card on a daily cost is instructive. Take a simple $100 payday loan repayable in 14 days plus a $20 fee. The daily cost to the consumer for the loan is $1.43 per day. The cost to a consumer for $100 outstanding on a credit card at 16.5% per annum interest is 4.5 cents per day.
In this example, the payday loan is 32 times more expensive than the credit card. If the payday loan was repayable in 7 days, the daily cost would be $2.86, which is 64 times more expensive than the credit card. These calculations are not easy to work out…most people would not realise what they face when they take out a loan with a payday lender. - One final example is of a consumer who requested a loan for $600. Fees included an establishment fee of $350 and interest on the loan was 30% over 39 weeks. The consumer was also required to give a bill of sale over her vehicle which was estimated to be worth $6,000.
| Related information: | |
| What is Payday lending ? | |
| Alternative sources of financial assistance | |
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Information on copyright for the Office of Consumer and Business Affairs website is provided on behalf of South Australia Central http://www.sacentral.sa.gov.au/site/page.cfm?u=60
Disclaimer
Information on the disclaimer for the Office of Consumer and Business Affairs website is provided on behalf of South Australia Central http://www.sacentral.sa.gov.au/site/page.cfm?u=61
Privacy
The South Australian Office of Consumer and Business Affairs (OCBA) is committed to protecting your privacy and the confidentiality of your personal information, consistent with the South Australian Government's Information Privacy Principles. If you would like to view the full privacy statement please visit: http://www.ocba.sa.gov.au/privacy.html
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If you wish to provide feedback on the Office of Consumer and Business Affairs website please contact the Webmaster via email mailto:webmaster@agd.sa.gov.au
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Information on accessibility for the Office of Consumer and Business Affairs website can be viewed at: http://www.ocba.sa.gov.au/accessibility.html