Payday Loans Can Hurt Your Credit Score
Since 2013, 600, 000 Australian households have accessed payday loans that are sometimes are so easy to obtain, an ice addict borrowed $15,000 to fuel his drug habit. ASIC has been scrutinising the practice for some time now, leading to payday lender Nimble refunding $1.5 million to over 7,000 consumers after failing to meet responsible lending obligations.
It can be very easy to get a payday loan, even if you have missed payments on a loan you currently have. In 2015 an ice addict managed to borrow $15k under the guise of business loans to fuel his habit. This lead to ASIC taking close scrutiny of the industry sector.
This resulted in payday lender Nimble being requested to refund $1.5 million to over 7000 customers for not meeting responsible lending obligations.
What are the traps?
Payday lenders generally charge around 240% interest p.a., and have high fees for defaults and dishonours. Getting a payday loan may seem like a short term necessity, but in the longer term it may leave you without enough money to pay for your day to day expenses and bills. You might have to take out another loan to get by which will only add to your overall financial stress.
In fact many payday lenders will keep an eye on your loan, and as you pay it off they’ll get in touch to offer you another loan as soon as you can afford it. Under the current legislation, you can have 2 active payday loans at any time, and you can pay 20% of your income into them each week.
Further, you’ll find that lenders push you to take the loan over a longer term – over a 6 month loan you’ll pay a much higher interest rate of 42-45%! Much higher than a 1-3 month loan where interest rates are 12-32%.
This means that if you borrow up to $500 for 3 months with a 25% interest rate, you’ll pay back $625 in total. If you borrow the same amount over 6 months, your interest rate could be 43%, and you’ll have to repay $715. This is before we count any loan fees and charges for missed payments that might occur.
In order to make sure you can’t go elsewhere, a payday lender might give you two loans to make up the amount that you need – saving you just a few dollars, but harming your credit profile with a second short-term loan.
Rent-to-buy – what does this actually mean?
‘Consumer leases’ such as rent-to-buy arrangements can end up being a lot more expensive than taking out a loan to buy the items that you need.
The ASIC review of rent-to-buy contracts revealed that customers commonly pay up to 3 times the value of an item over the term of the contract. This means that for a $700 washing machine, leased at $83.69 for 12 months, the total repayments were $2,175.94.
If you are offered finance or a rent-buy contract that you have not requested, under the ASIC Act, you are not liable to make repayments under that contract. If you have undertaken a contract like this, and change your mind about an unsolicited contract, under the law you can return the item and cease further payments. If you’re unsure about this, you can talk to a community legal advisor about the best way to assert your rights under the legislation.
What’s the effect on your credit profile?
Banks and lending institutions view payday lenders as a desperate measure taken by a person who has cash flow trouble. If there are payments to a payday lender on your statements, it’ll count against you when you apply for a regular loan with low interest rates – even if you have a perfect repayment history.
The impact can be significant – first time borrowers quickly become repeat borrowers taking out an average of close to 4 payday loans per year.
What are your other options?
All across Australia, you can get a no interest loan for things that you need, and you won’t pay any more than you actually borrow. You can find out where to get these loans here.
If you live in Victoria, you may be able to access no-interest loan for essential goods and services up to $1200.
In SA, you’ll find a Good Money store at 58 John Street, Salisbury, (open Mon-Fri9.30am-4.30pm) which is funded by a state Government grant to provide financial services to disadvantaged South Australians.
A large majority of payday lending in Australia occurs online – in 2015, 48% of people found out about payday lending online, and 68% of people accessing payday loans did so online.
Google has responded to this by banning the advertising of credit products where the repayments were due in full within 60 days. This doesn’t affect traditional TV, billboard, newspaper or radio advertising channels.
2. Sell Unwanted Goods
If you’ve got things that you don’t really use, they might be useful to someone else. You can sell items on eBay, Gumtree, or even a local Facebook group for second hand goods.
3. Ask at a Community Organisation or Centrelink
If you’re on a Centrelink payment and you need money for a large purchase, you may be able to get an advance. This is good for you too, because there won’t be any interest paid.
Even if you aren’t on a payment, you may be eligible for a one-off crisis payment.
You could also try an organisation like Anglicare, the Salvation Army or other church based organisation for some help in the short term.
Your local community legal centre may be able to help you with any contracts and debts, and you can call 1800 007 007 from anywhere in Australia to speak to a financial counsellor to help get you back on track and manage outstanding bills. Have a look at the Financial Counselling Australia website to find a face to face counsellor and get more information about what your real and practical options are.
4. Personal Loan or Credit Card
Getting a personal loan or using your credit card in the short term could mean that you pay a lower interest rate on the amount you need – usually around 15-20%.
As long as you make the minimum repayment each month, you won’t damage your credit file, and you can pay down the amount borrowed as soon as you possibly can.