If you reckon credit cards are costly, you may be surprised to learn that there is another type of debt that can be far more expensive.
The culprit I’m referring to is payday loans – also marketed as ‘short term’ finance. These loans are typically for low value sums of up to $2,000, and they can usually be arranged in a matter of minutes either over the phone or online.
The problem is that convenience comes at a cost, and payday loans can quickly become overnight debt traps.
According to comparison site Finder, it can cost more to borrow $1,000 for one month with a payday loan, than to borrow $2,000 for 12 months with the average unsecured personal loan.
The reason for this is the over the top fees and charges that apply to payday loans. Some lenders charge an ’establishment fee’ of 20% of the amount borrowed plus interest set at 4% per month.
Faced with those sorts of charges, it could cost you $240 to borrow $1,000 for 30 days – about a quarter of the amount borrowed amount. So it’s not surprising that payday loans have the potential to push battlers over the edge – more so because you don’t always have much time to repay the debt. Repayment terms are typically 30-60 days.
Despite the downsides, Finder recorded a six-fold increase in the number of people taking on payday loans in the lead-up to the 2014 festive season. It’s right about now that many of these borrowers could be realising just how expensive payday loans are.
The thing is, there are alternatives and if you’re considering a payday lender it’s important to explore every other option first.
If you receive a government pension you could be eligible for a Centrelink advance or interest-free loan. If you’re struggling with bills speak with utility providers about a payment plan. Or, if you are facing difficulties paying off your mortgage, talk to your regular lender about their hardship provisions.
I realise that payday loans don’t just appeal to battlers. It can be difficult to secure a bank loan for less than $5,000 these days, however if you only need a small loan do look around at the alternatives. IMB for instance offers an unsecured personal loan of $2,000 with a rate of 12.49%.
If you are tempted by the quick approval time of a payday loan, bear in mind that you also face a tight payback period. If you are struggling to pull a few hundred dollars together today, it could be a lot harder to scrape together the cash you’ll need to repay the loan – plus charges – within a month or two. It is this aspect of payday loans that can see people who wouldn’t normally be regarded as doing it tough financially, fall into a desperate debt spiral. Don’t be tempted – payday loans are just too expensive.