A payday loan, (often referred to as a small amount loan or a short-term loan) is a loan of around $2,000 or less, which can come with huge fees and interest rates attached. They can be quick to secure but contrary to what some may think, they may not be a great option for those in financial difficulty.
What is a payday loan?
A payday loan is generally for an amount of $2,000 or less, and generally for a period of time between 15 days and one year. A medium amount loan is for an amount of between $2,001 and $5,000.
What does it cost?
The fees and interest rates can be substantial. To give you an indication, on a loan of $2,000 or less, lenders are able to charge you:
- An initial establishment fee of 20% of the total amount loaned
- A monthly account keeping fee of 4% of the total amount loaned
- A government fee/charge
Additional charges as a result of default or non-payment may include:
- Default fees/charges
- Enforcement expenses, which are the costs of the lender going to court to recover the sum you owe them
On loan amounts between $2,001 and $5,000, lenders can charge:
- A one-off fee of $400
- A maximum annual interest rate of 48%, including all other fees and charges
Is it regulated?
The good news is that there have been a number of changes to the regulation of these loans over the past few years. The responsible lending laws aim to ensure that short term loans are only given to those who will definitely be able to pay them back. It’s up to the lender to check and ensure that the potential borrower can repay the loan
Also since 1 July 2010, it has been illegal for lenders to take security over essential household property or tools of trade. However this doesn?t make you immune to financial penalty if you default on your loan. Default fees can be up to twice the total amount loaned, and are on top of the amount of the loan not repaid yet.
So while you might be out of pocket for the next few weeks after a big night out or a big purchase, check your borrowing options carefully. A short term loan may not be the best solution.
Check out our Personal loan repayment calculator.