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!

 

 

How to get rid of credit card debt

How to get rid of credit card debt

How consolidating your credit card debt can save you money.

Brendan Barker - Home Financing Specialist - Home Loans - Car Loans - Personal Loans

$32,000,000,000. Yes Thirty Two Billion Dollars.  That is the credit card debt currently owed by Australians, that’s an average of around $4,300 per card holder.

With interest rates on credit cards typically running at 15% to 24% the average credit card owner would be paying $650 to $1,000 per year in interest.

This doesn’t include any fee’s and charges the credit card provider may charge.

Add in a second credit card or a personal loan or two, and it is not difficult to see why it is so easy to get yourself into financial strife with debt.

How do you get on top and manage your credit card debt?  Read on to find out…..

Top Three Tips for Managing Credit Card Debt

Your individual situation will most likely be very different to the national averages.  You may have significantly more credit card debt or you may have none.

Regardless of how much or little credit card debt you may have, the following 3 tips are worth following (at least the first two if you have no debt).

  • Have a budget – if you don’t know what your income and expenditure looks like each month, there is no way to know if you can afford that new dress, latest iPhone or that cruise you have been dying to take.
  • Set up a regular savings – savings form an important part of your household finances, allowing you to afford the bigger ticket items or pay for those unexpected expenses.
  • Consolidate your debts – This simplifies your repayments and means you only have to deal with one interest rate. Typically you will end up paying a lower amount of interest which will save you money.

Competition

How to get on top of your finances with Debt Consolidation

What exactly is “Debt Consolidation” – it means refinancing your debt onto the lowest interest rate possible – and setting up a realistic repayment plan to get it paid off!

The key here is having the plan to pay off the debt.  If you don’t budget to pay off the debt, all that will happen is that you will keep on getting further and further into debt.

So what are the 3 Main Options for Consolidating Credit Card Debt?

  • Transfer your Credit Card Debt onto another Credit Card offering Balance Transfer Rates

This can be a great option, as there are many Credit Card providers offering 0% on balance transfers for 6 or 12 months.  However, this only works if you can pay off the debt within that time period.

While you can continue to transfer the debt from card to card, this will start impacting your credit score and could impact on what lenders will give you in the future.

  • Consolidate your Credit Card Debt with a personal loan

Using a personal loan for debt consolidation has the significant benefit of the personal loan having a defined lifespan.  The repayments will have been calculated so you pay off the loan over a certain timeframe (3 to 7 years).

This will save you a significant amount of money in interest, but you may end up having to repay more each month on the personal loan than you currently paying off the credit cards.

  • Incorporate your Credit Card Debt into your Home Loan

Provided you actual have a mortgage and equity in your home that can be used for debt consolidation.

By incorporating your credit card / personal loan debt into the home loan, and increasing your home loan repayments accordingly will not only save you on interest but will allow you to pay off the home loan sooner.

Of course these strategies will only work if you stop adding to your current credit card debt.  If you cannot control your spending habits the best option is to cut up the credit card.  If you can commit to controlling your spending, then debt consolidation can save you a lot of money.

Would you like some help to save money while getting rid of unwanted credit card debt?  Don’t know where to start?  Give me a call on 07 3423 8730 or fill in the enquiry form here to set up a free and no-obligation chat to see how I can help you get rid of your unwanted debt and to save money.

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