The risks associated with payday loans

The risks associated with payday loans

We’ve all seen the movies where the luckless protagonist borrows money from a remorseless loanshark and is warned that they’ll lose a finger for each day they’re overdue.

Fortunately, us Australians have much more civilized short-notice borrowing options, but that’s not to say there aren’t any risks associated with payday loans.

What’s a payday loan?

Put simply, a payday loan is money lent at short notice at a high rate of interest over a small period of time.

The name is basically derived from the understanding that the money will be paid back as soon as the borrower’s next pay cheque rolls around.

These days, however, the loan can be repaid over the course of one year (larger loans can be taken out over even longer periods, too).

Usually, payday loans are between $200 and $2000, and they tend to be paid back via direct debit on your pay day, or even a deduction from your pay itself.

What are the risks? Are my fingers safe?

Rest assured that ‘Bobby and the boys’ won’t be waiting for you in any empty car parks or down any dimly lit alleyways.

However, that’s not to say payday loans aren’t without their risks.

For starters, while the fee you are charged varies according to who you borrow from and how much your borrow, credit providers can charge you a one-off establishment fee of 20% and a monthly account keeping fee of 4%.

ASIC’s Moneysmart website has got a pretty handy calculator that shows if you borrowed $1500 to pay for unexpected car repairs, you would have to pay back $2040 over four months just to pay off your debt, or $2520 over one year.

Depending on how long it took you to pay back, that’s an extra $540 or $1020 you could have invested or spent elsewhere.

So if you’re relying on payday loans every time trouble strikes, you’ll soon rack up quite the bill.

If your financial situation takes a turn for the worst

Bad: If you default on a payday loan, the lender will likely charge you a default fee until you repay the outstanding amount in full.

Worse: If you do fall into default, the lender can then charge you twice the total amount of the loan.

Worser: If you fail to pay back the loan after falling into default, the lender can claim enforcement expenses, which are the costs of them going to court to recover the money you owe.

Worst: If you’re still unable to meet your debts by this stage, and have exhausted all other repayment options available to you, you may end up having to consider applying for bankruptcy.

Alternative options

Fortunately, other options are available for those in need of short-term cash, including:

– It’s always better to plan ahead rather than waiting until disaster strikes. So create a savings account where you put away 5-10% of each pay cheque for emergency situations. You can start today!

– See if you’re eligible to apply for a no or low interest loan instead. They’re available to people with a Centrelink healthcare or pension card.

– If you absolutely need to buy an essential household item such as whitegoods or a computer, you can see if the store has a 12, 24 or 50 month interest-free repayment option. Just make sure you cut up the credit card so you don’t get tempted to use it for anything else. And make sure you meticulously stick to a repayment plan or you may find yourself in a similar situation to the one outlined above.

Final word

You can save a lot of money by simply having an emergency funds buffer to lean back on.

If you’d like more tips or strategies on how to make your money work best for you, make sure you come and pay us a visit – we’re a much friendlier and helpful bunch than those Hollywood loansharks!

 

 

Mortgage stress: What it is, and how to avoid it

Mortgage stress: What it is, and how to avoid it

You might be comfortable paying off your mortgage now, but what if things change? Here are some tips on how to avoid a mortgage stress fracture.

Paying off a mortgage is one of the biggest financial challenges you and your family will ever tackle.

And it isn’t easy – mortgage repayments take up about one-quarter of a family’s income on average, according to the Australian Bureau of Statistics’ 2016 Census.

While most families manage, what happens if your circumstances change?

An unexpected redundancy, relationship breakdown, illness or accident can dramatically impact your ability to make your payments and put you in mortgage stress.

But first, what is mortgage stress?

While there isn’t a technical definition for the term, mortgage stress is generally considered to occur when a person or family is spending 30% or more of their income on home loan repayments.

There are also a range of other criteria which would suggest you’re experience mortgage stress.

If you’re paying only the interest on your home loan, borrowing money from family, or having difficulty paying your bills, then you might be experiencing mortgage stress.

I don’t have a problem now, why worry?

It’s unwise to assume your circumstances will never change. An accident or illness can befall a person at any time, and the impact on your finances can be devastating.

An increase in interest rates can also have a significant impact on your mortgage repayments. A simple 0.25% rate hike can increase repayments on the average Australian loan ($375,000) by about $50 a month.

Over the course of a year – and with a potential of further rate hikes – this can really chew into your disposable income.

Ok, so how can I avoid it?

The smart borrower won’t wait for their circumstances to change, they’ll start planning now to make sure they can weather a storm if it hits.

Steps you can take to reduce your risk include:

Step 1: Use a mortgage calculator to see what your repayments would will look like if there was a rate increase. Would you be able to keep up?

Step 2: Review your current income and expenses, and make a new family budget. Use it to track where your money is going and where savings can be made, so you can either pay off your mortgage sooner or get by if things go awry.

Step 3: If you’re worried about your mortgage, or concerned about the impact of a future rate hike, give us a call.

We can talk to you about your situation and help you make a plan to ensure a small problem doesn’t become a big one.