Can I use payday loans with bad credit?


Payday loans in Australia can be an easy way to access instant cash. If you have a bad credit history and need fast cash loans, there aren’t many options available to you besides payday loans. But are payday loans the right move for you? 

In this article, we’ll cover everything you need to know about taking out payday loans for bad credit. 

Let’s get to the following commonly asked questions: 

  • What are payday loans?
  • Are payday loans available to people with bad credit?
  • Examining the risks and potential pitfalls
  • Assessing your ability to repay
  • Exploring alternatives to payday loans

Q1. What are payday loans?

Payday loans are often seen as emergency loans for those that need a small amount of cash fast. They typically are short-term loans with high-interest terms, and borrowers typically repay the loan on their next payday.

It’s important to note that payday loans can come with extremely high-interest rates. In Australia, the Annual Percentage Rate (APR) can be as much as 400%! This makes your total repayment much higher than the initial amount you borrowed, and fees and charges increase rapidly if you don’t make payments in time. 

Note: Because of this, many have fallen into financial hardship after taking out a payday loan. It’s essential to borrow responsibly and only use payday loans from a third-party company as a last possible resort. 

Q2. Are payday loans available to people with bad credit?

A payday loan can be used as a bad credit cash loan for individuals in Australia. If you have poor credit and need a quick personal loan, then payday loans are a potential option for you. 

Compared to other types of loans, payday companies carry out minimal credit checks - they focus more on whether the borrower can repay their loan on their next payday rather than checking their credit history. 

By assessing your financial situation quickly, such as your income and debts, the payday company will offer almost instant approval and deposit your cash loan into your bank account. 

Important: Borrowing from payday lenders is quick and easy. However, many see these third-party companies as predatory and not practising responsible lending. Since payday loans are unsecured loans, interest rates are high. 

Q3: Examining the risks and potential pitfalls

As loans for people with bad credit, payday loans cost a lot in the long term, which can increase the cycle of debt. While they are helpful for getting emergency cash, loan repayment can wipe out a person’s monthly salary almost immediately. 

Here are the potential risks and pitfalls of using payday loans: 

  1. High-interest rates and fees. Payday loans for bad credit have extremely high-interest rates and fees if you cannot pay on time. Since instant cash loans are designed to be paid back on the borrower’s payday, interest is initially high and only goes up over time. This can worsen your current financial situation. 
  2. Debt cycle. Because of their short repayment time and high costs, having a payday loan with bad credit means borrowers can easily be unable to repay the loan in full on their next payday. They will then need to roll over or renew the loan and pay more monthly fees, leading to a debt cycle. 
  3. Financial stress. Borrowers who are forced to take out payday loans may already be in a financially difficult situation. Adding the burden of quick cash loans can worsen stress and financial hardship. 
  4. Impact on credit score. If you find yourself unable to repay your payday loan with bad credit, you may be reported to credit bureaus which will make your score even worse. 

Read more: Tips for improving your credit score

Q4: Assessing your ability to repay

Assessing your ability to repay a payday loan is essential to stop you from falling into a cycle of debt. Before taking out any fast cash loan, evaluate your financial situation, understand how much you can repay every month, and create a plan to repay. 

Here’s how you can assess your ability to repay. 

Calculating your debt-to-income ratio

Your debt-to-income (DTI) ratio is a useful indicator of your financial health and your ability to take on more debt. 

Here’s how it's calculated: 

DTI Ratio = (Total Monthly Debt Payments / Gross Monthly Income) x 100

A DTI ratio below 30% is considered healthy, meaning you have enough regular income to cover your debts. You have limited room for additional debt if you have a ratio above 40%. 

While payday loans typically have fast approvals and will accept your online applications with a debt ratio above 40%, this isn’t considered to be a responsible lending practice. If you want to improve your credit score, avoid taking on too much debt. 

Creating a realistic repayment plan

By creating a repayment plan, you can ensure you repay your payday loan on time without worsening your financial situation. Start by assessing your budget by listing your income and monthly expenses.

Identify available funds you can use for repayments without compromising expenses and financial commitments. Finally, choose a realistic repayment period. Ensure you can make payments without struggling to cover your everyday expenses. 

Summing up

Payday loans have a fast application process and are often approved almost instantly, making them useful for those in a financial emergency. However, with high annual percentage rates (APR) and short-term repayment periods, taking out quick loans can be a costly way to borrow money. Only use payday loans as an emergency measure to avoid tanking your credit score. 

If you like this article, stay updated with the WeMoney blog, where we regularly post financial advice to help you take control of your money. Alternatively, read our informative article, ‘7 stages of financial independence.’

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Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation.

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