What are payday loans?


Payday loans are fast cash loans offered on a short-term, high-interest basis. This loan type provides an advance payment for borrowers and is suitable for emergency cash advances. 

You must determine payday loan risks before completing the application process and accepting the amount to borrow. You could find it challenging to repay the loan due to high-interest rates and short payment terms, causing damage to your credit score.

This is where we can help. Find out more about personal finance so you can better manage your money. How do payday loans work, and what are the available alternatives?

Let’s get to the following commonly asked questions:

●     How do payday loans work?

●     What is the dark side of payday loans?

●     How can I spot reputable lenders?

●     What are the alternatives to payday loans?

Q1. How do payday loans work?

Payday loans are fast loans that you can access when experiencing financial hardship. These cash advance loans are usually targeted as a financial solution if you have bad credit.

Consider borrowing money for paying your bills, completing home renovations, topping up your bank account before your direct debits are due, or for the general cost of living expenses.

Apply online for a fast payday loan from a loan provider, use a mobile app, or apply in person. Very little documentation and no credit checks are usually required for a payday loan, recognising that you need access to fast cash in financial emergencies. 

An instant decision is typical of payday lenders. They will present the amount of money you can borrow and the loan term and loan repayment figures.

After assessing the interest rates and the total repayment of the loan, decide if you want to go ahead and agree to the loan as your line of credit.

Once the agreement is complete, you will receive the emergency cash loan almost instantly. This could occur through a money transfer or as a cash loan if completed in person.

Q2. What is the dark side of payday loans?

Instant cash loans are notorious for their high-interest rates and fees. As a result, you could fall into debt traps if you miss your repayment due date.

Despite providing loans for low-income families and loans for unemployed individuals, payday lending can easily lead to the payday loan debt cycle.

When borrowing $300 on an Australian credit card, fees and interest charges fall at $19.07. However, borrowing $300 over three months from payday emergency cash loans can see a tenfold increase at $192 in fees and interest. With these sorts of fees to pay, it is easy to see why some borrowers fall into a cycle of debt.

Note: Substantial loan interest rates can result in a high loan cost you cannot repay, owing much more than originally borrowed. A UK study found that borrowers typically borrow 1.65 times the amount they borrowed.

Image: NimbleFins

Q3. How can I spot reputable payday lenders?

Spot reputable payday lenders by researching lender credentials and reviews to identify warning signs of predatory practices. 

Most payday lenders offer quick cash with zero credit checks and credit ratings. However, not all payday lenders invoke predatory lending techniques and loan sharking.  

To find a reputable payday lender, assess a credit guide and the types of credit contracts offered by lenders. Check whether they provide consumer financial protection and analyse the possible comparison rates.  

Important: Find out whether a late fee is applicable if you fail to pay your instalment loan on time and any monthly fees. Furthermore, check the annual percentage rate to know how much you must repay.

Q4. What are the alternatives to payday loans?

You could apply for credit cards, a home loan, or a personal loan to boost your finances. While payday loans are low-cost options for short-term needs, there are many other alternatives to payday loans that do not carry such heavy financial risks. 

Borrowers who apply online for payday loans usually look for emergency loans or bad credit loans to deal with a financial solution. However, building up your credit history and credit score over time can lead to accessing unsecured loans from a bank. 

You will achieve lower interest rates as a result. Assess your personal loan calculator and eligibility for personal finance today. 

The total repayment amounts will be transparent with these types of loans, and no hidden fees will appear. Banks will practice responsible lending and follow all lending laws and the lending act. 

However, you should supply documentation such as bank statements and details of debit cards and savings accounts when making online applications for loan amounts. Or, if you have a valuable asset, you can see whether refinancing with home loans is an option for you. 

Other options include seeking financial assistance from government and non-profit organisations to access government benefits, business loans, or grants. 

Note: Further help is available from Centrelink loans, credit unions, and the national debt helpline. Seek legal advice from a financial counsellor on the National Consumer Credit Protection Act 2009, which offers the consumer financial protection.

Rising debt levels

Before applying for a payday loan, ask yourself if you need the money and if you can pay it back. Applying for an easy loan may seem attractive, with online loans and applications making emergency cash loans simple to access. 

However, as a loan borrower, you could be in a worse position than you initially started. This may include seeking finance from a third party to repay your first payday loan.

Debt consolidation

If you owe sums of money to numerous lenders, see if you are eligible for debt consolidation and stop money anxiety today. This quick and easy process is as simple as applying for a loan online, yet it can consolidate all your debts into one manageable monthly payment. 

With debt consolidation loans, you will find your debt problems vanish, so you can start to sleep properly again at night. Financial independence will be within reach.

Summing up

Taking out a cash advance can be risky, especially if you are already in a cycle of debt. Interest rates are typically much higher than a standard loan, even when you borrow from responsible lenders. It’s essential to borrow responsibly and seek financial advice if you find yourself struggling to pay off your short-term loans. 

If you liked this article, stay updated with the WeMoney blog. We regularly post financial advice for our readers to help you stay on top of your personal finances. Alternatively, read our latest article: “How to get a home loan with no deposit.”

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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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