Payday loans: what to look out for

Sub Editor · 16 September 2021
They are called payday loans, small amount loans, cash loans, small loans, short-term loans and more, but the allure of getting cash quickly this way can conceal significant hidden fees and costs that leave a lasting sting on your hip pocket.

Sometimes a crisis comes up in life, and you need money quickly. Or sometimes, despite your best efforts, you may fall behind paying living expenses like rent, electricity and food. If you don’t have an emergency fund or regular savings, you might consider asking a friend or family for help or borrowing some money from a credit provider.

Payday lenders often offer loans of up to $2,000 – promising fast, convenient and easy access to cash. But are they a smart choice for Australians financially?

What is a payday loan?

A payday loan is a loan of up to $2,000 that you have between 16 days and one year to pay back, according to the Australian Securities and Investments Commission (ASIC)’s Moneysmart website. Payday loans are also known as small amount credit contracts, or SACCs.

Lenders cannot legally charge interest on payday loans. However, there are often very high overall fees attached that aren’t always obvious upfront for borrowers. These fees are capped but can still be very high compared to most other forms of credit. They can include an establishment fee (up to a maximum of 20% of the amount borrowed), a monthly service fee (up to 4% of the amount borrowed, every month) default fees and enforcement expenses. Moneysmart warns that if you take out one of these loans, you’ll end up needing to pay back “a lot more than you borrowed”.

What are the pros and cons of payday loans?

Although getting a payday loan might seem convenient, the Financial Rights Legal Centre explicitly says “using a payday lender is not recommended”. Here are three cons of payday loans:

1. Overall cost

Payday loans bring high fees – such as an establishment fee (up to a maximum of 20% of the amount borrowed), a monthly service fee (up to 4% of the amount borrowed, every month) default fees and enforcement expenses.

Dr Vivien Chen
Dr Vivien Chen.

Dr Vivien Chen, a Senior Lecturer at Monash University, is part of the Harmful Financial Products project. She’s helping investigate how fringe credit options – including payday loans – are impacting consumers in financial stress.

“Digital platforms make payday loans very accessible, almost too accessible – but often, borrowers do not fully understand the costs, risks and consequences of these loans,” she told Canstar.

2. Risk of unmanageable debt

If you borrow money and need to repay it with high fees, charges and penalties payable, you will be more likely to get into unmanageable debt than if you accessed the money in a cheaper way. This can become a serious financial problem in the longer term.

3. Potential damage to your credit score

If you repeatedly shop around for credit and apply to multiple credit providers in a short timeframe, or miss any loan repayments, your credit score might drop, and this could stay on your credit history for some time. Having a low or bad credit rating can affect your borrowing capacity in the future. For example, it might affect whether you are approved for a car loan or a home loan, plus the interest rate a lender charges you.

→ You can check your credit score for free

Who uses payday loans?

Research by a national coalition of consumer advocacy groups, Stop the Debt Trap, shows over 4.7 million individual payday loans were issued for around 1.77 million Australian households between April 2016 and July 2019, generating about $550 million in net profit for lenders. Many Australians who are experiencing financial stress turn to payday loans, with earlier research showing payday loans are increasingly available on digital platforms. Often, vulnerable women, commonly with sole responsibility for children, are relying on payday loans as emergency cash for household expenses. These women are unfortunately also taking out multiple loans in many cases, according to Good Shepherd Microfinance.

Why are payday loans a poor credit choice?

If you are already in a difficult financial situation, payday loans can make it worse. Stop the Debt Trap’s research suggests around 15% of payday loan borrowers fall into a “debt spiral” within five years. Over this time, Stop the Debt Trap estimates, about an extra 324,000 Australians may progress towards a debt path that might lead to an event like bankruptcy.

What regulation applies to payday loans in Australia?

Under Australia’s credit legislation, including its responsible lending regulations, banks, credit unions, brokers and other lenders are regulated and licensed in Australia, and aren’t allowed to give credit to borrowers who can’t pay it back.

Additional responsible lending laws apply to small amount credit contracts (SACCs) under the National Consumer Credit Protection Act at the time of writing, including the fee caps discussed earlier. Recently, stakeholders including consumer groups have shared their views about proposed credit reforms as part of a Senate inquiry, with concerns there may be weaker protections for consumers in future from predatory lending.

What are some alternatives to payday loans?

Australians should seek free, professional help from a financial counsellor instead of taking on debt from a payday loan or an alternative like a personal agreement.

“Consumers who are experiencing difficulties making payments for utilities, telecommunications or loans can contact their service provider for hardship arrangements such as an extension of time for payment,” said Dr Chen.

“Additional help such as utilities relief grants or household relief loans may be available and people who are experiencing family violence and are facing financial difficulties can seek hardship assistance from their credit or utility provider.”

Dr Chen said that if consumers have trouble reaching suitable hardship arrangements with a credit or utilities provider, they could consider contacting a financial counsellor to assist with negotiations, as this might lead to better outcomes.

“Free debt advice and debt negotiation are available from the National Debt Helpline (NDH),” she said.

The NDH are both free and impartial. A financial counsellor can help if you need to “negotiate a settlement of debts” with existing credit providers, plus join calls with you as an advocate if you need support handling difficult money conversations with credit providers.

Separate to addressing how you manage debt, ASIC’s Moneysmart suggests the No Interest Loans Scheme (NILS) or a Centrelink advance payment may be suitable, cheaper options if you are eligible and need to get money fast.

What support is available if you are in financial stress?

If you are having trouble paying your bills, Moneysmart recommends talking to your lender or other service provider straight away. You can get urgent money help, and contact the National Debt Helpline for free, impartial financial counselling on 1800 007 007. A financial counsellor can help you to have difficult discussions with existing lenders if you are in debt, and to discuss payment terms to make your debt manageable.

Payday loans: frequently asked questions

What is a bad credit payday loan?

A payday loan, or small amount credit contract, or SACC, might be marketed to you as a ‘bad credit payday loan’. This means a lender is targeting the loan towards people who have a bad credit score, as they may be less likely to get approval for credit. Keep in mind that if you have a low credit score, you are likely already financially vulnerable – you could have fewer borrowing options than someone with a higher score. Making repeated requests for credit can negatively impact your credit score. If you are alternatively considering a bad credit personal loan, we’ve covered what to look out for.

Should you take out a payday loan?

The Australian Securities and Investments Commission (ASIC) says on its Moneysmart website that when it comes to payday loans, “there are cheaper ways to borrow money when you need it”, adding, “If you’re struggling to pay your bills, don’t get a payday loan.” To protect your credit score and finances, you might like to consider other options aside from a payday loan if you need to borrow money, such as a NILS loan or a Centrelink advance.

How much does a payday loan cost?

You can use the Moneysmart Payday loan calculator to help work out the true cost of a payday loan, modelling the costs based on the loan details such as the amount (up to $2,000) and borrowing term (from 16 days up to one year).

What is the interest on a payday loan?

No interest is allowed to be charged on a payday loan. However, there are often very high overall fees attached that aren’t always obvious upfront for borrowers. These can include an establishment fee (up to a maximum of 20% of the amount borrowed), a monthly service fee (up to a maximum of 4% of the amount borrowed, every month), default fees and enforcement expenses.

Are payday loans dangerous?

Research by Stop the Debt Trap suggests payday loans can be “devastating for the people involved” because “these products are aggressively marketed, which can drive people away from other services that may be more suitable, such as free financial counselling or no or low interest loan schemes”. The National Debt Helpline says the risks of payday loans include very high costs, needing to borrow again to repay the loan, a potential negative impact on your credit rating, high default fees, and being difficult to get out of. Plus, it adds, payday lenders usually sign customers up to pay by direct debit on payday. This can mean money is taken out of your income before essential expenses such as food and rent. If you find yourself unable to make ends meet, you could find yourself in a debt trap that brings more serious long-term consequences.

How do you take out a payday loan?

Consumers can take out a payday loan online or by contacting a credit provider that’s offering high-cost, short-term loans directly over the phone or in person. Lenders will usually require applicants to share information that relates to their income, identity and the loan purpose. If you have a severe history of default or a bad credit rating, you might get turned down for a payday loan, and making multiple requests for credit can have a negative impact on your credit rating.

Can anyone get a payday loan?

Payday lenders tend to be more flexible in their borrowing requirements than major banks. So, if you’re self-employed or have a poor credit rating, you might pass some payday lenders’ borrowing standards. However, you’ll still need to show you have capacity to repay the loan, and this will be assessed based on factors such as your income, spending, identity, employment and credit score. If you are under 18, are not an Australian citizen or resident, have unstable or insecure employment, have a history of poor spending habits, have a low income or have a bad credit score, you might be declined access to a payday loan. Speaking to a financial counsellor for advice on getting your debt under control could be helpful, ideally before you consider applying for a payday loan. Free, confidential advice is available from the National Debt Helpline on 1800 007 007.

Main image: By Visual Generation/

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This content was reviewed by Sub Editor Tom Letts as part of our fact-checking process.

Jacqui is a senior communications professional with 15 years of experience in journalism, editing and public relations. She brings international experience as a Global Content Manager for ABB and has held senior editorial roles in Australia with the Queensland Government, UQ and John Wiley & Sons.

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