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PayDay Loans

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Payday Loans

Payday Loans are simply a short term loan from a non-bank lender, that you typically repay within a few weeks. They are an option for financing emergency payments, but:

  • They are costly – a typical charge for the loan would be $50 for a $1000 loan over a 4 week loan term. Which means that you pay back $1050 after 4 weeks. Doesn’t sound too bad? Maybe not, but this works out too an equivalent interest rate of 65%pa!!!
  • If you are struggling to make ends meet, then a payday loan will just make things worse. Your loan will be due, so you use all your pay to pay it off, then you’ll have no money so you’ll take out another payday loan – and the cycle continues.
  • You can also secure short-term loans using an item of value – the old pawnshop concept. Same deal though, to get back the item you used as security you need to repay the loan plus a charge. Some people use this as an option for ‘selling’ unwanted items, but just be careful you are getting good value.
So the golden rule with Payday loans – use them as a last resort!!

A Case Study
I saw a series of adds for payday loans – one of them showed a young woman using her Grandmother’s ring to secure a loan so she could go out with her mates to celebrate her Netball Team winning the finals.

Another ad showed a builder using his cement mixer to secure a loan for a nail gun so he could complete another job. This ad then went on to show him getting paid for his nail gun job, and getting back his cement mixer with the money and still make a profit.

What’s the point here?

Well the point is that if you need the money to make money, as is the case with the builder, then a payday type loan (secured with the cement mixer in this case) is probably a good move. Not only did this builder make a profit, he also got a nail gun while keeping his cement mixer in the end!

But the Netballer? Well, if you can’t afford to go out and party with your mates, I’m sure they’d understand and do something less lavish, wait until pay day or spot you until you can pay them back. In this case, the woman may have had a good time, but she now has to repay the loan including fees and charges from her next pay to get back her Grandmother’s ring.

And then the cycle will start all over again! Because she used her pay to get back the ring, how will she now pay for food, utilities and other bills? Another PayDay loan of course!! And that’s the risk with payday loans – you are always chasing your tail (or your next pay in this case).
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