What Are Payday Loans Advantages and Disadvantages?

Payday loans can be a quick way to get the cash you need if you’re in a financial bind. However, they also come with some significant risks, like getting trapped in debt.

Nowadays, several households are getting these loans, which is why it’s important to know the payday loans’ advantages and disadvantages first before applying for one. 

While the Australian Securities and Investments Commission (ASIC) ensures that payday lenders only loan to people who can repay these loans, it’s still important for you to know the ins and outs of the industry. 

In this article, we’ll share the most important pros and cons of payday loans, as well as other aspects of these loans.

What this article covers:

Payday Loans Pros and Cons

Advantages of Payday Loans

Let’s see the benefits of taking this type of loan.

Unsecured Loans

Most payday loans, if not all, are unsecured loans. Basically, there’s no need for you to attach any type of collateral just to get the loan you need. Since payday loans are just a small amount, lenders will trust that you can repay them on time.

So, what if you don’t repay? What they’ll usually do is file a case against you. Payday loan organisations can contract third parties to conduct legal investigations.

payday loans advantages

Accessibility

One of the advantages, and why they’re popular and highly sought-after, is that they’re easily accessible. There are hundreds of companies online that offer payday loans around the world. You can easily apply online to get the loan you need. 

No Credit Check

Most payday lenders won’t bother checking your credit history anymore. So you shouldn’t worry if you have bad credit.

However, always read the lenders’ websites to find out if they don’t do credit checks since there are still some that do, especially if you’re applying for an unsecured loan.

Less Hassle for Requirements

Unlike other loans, payday loans only require fewer requirements. Mostly, you’ll need to have some identification documents and proof of income only.

Disadvantages of Payday Loans

Now, it’s time to go through the downsides of payday loans.

Costly

Payday loans are costly. 

Before ASIC set regulations for payday lenders, the latter could easily impose exorbitant fees and interest rates on their clients. They can reach for up to half of the total loan. Moreover, the repayment term was short, usually between 7 to 15 days only. 

disadvantages of payday loans

Today, ASIC has implemented certain interest rates on payday loans. According to them, there will be a one-time establishment fee of not more than 20% and a monthly account-keeping fee of no more than 4%.

However, payday loans are still costly compared to other kinds of loans. 

Debt Cycle

One of the worst things that can happen with relying on payday loans is getting trapped in a cycle of indebtedness. Many easily get tempted to borrow easy cash without knowing how big they can get once they accumulate. 

What will really bury you in debt is the fees. Since these loans are expensive, you’ll end up paying more the more you borrow. It’ll be a never-ending cycle if you can’t find a solution fast, like getting a debt consolidation loan. 

Predatory

When ASIC was formed, its priority target was those lenders that prey on easy Australians. These lenders don’t usually assess the borrowers’ financial situation, so they’ll be charged late-payment fees and additional charges. 

Always remember that even if ASIC is out there to help you, don’t fall prey to shoddy lenders.

No Credit Scoring

While it might be advantageous that most payday lenders won’t do credit checks, it also means that they won’t report anything to credit bureaus about your credit performance. In short, they won’t help build your credit score.

What Are the Requirements for a Payday Loan?

Each payday lender has their own set of requirements, but they’ll usually ask for the following:

  • Contact Information
  • Employment Details
  • 100 Points of Identification
  • myGov Account (if applicable)
  • Internet Banking Details

Note that you need to be at least 18 years old on the day of application, have a permanent address in Australia, a bank account, and proof of income for at least 6 months. 

advantages of payday loans

How to Find a Good Payday Lender

Finding a reputable payday lender in Australia can be tricky. There are many lenders out there, some of which are better than others.

ASIC recommends that you should only trust a lender who they licence. However, this usually doesn’t tell much about their customer service quality and other factors. Still, make sure that your prerequisite requirement from a lender is one that they licence. 

From there, you can move to the following tips:

  • Check out reviews before you apply for a loan. You can find this information on the company’s website or by doing an online search. Look for recent reviews and information about customer service and the quality of the loans themselves.
  • Ask friends or family members if they’ve used payday lenders’ services before. If so, ask them about their experiences with those companies and how they’d rate them on a scale from 1 to 10. This way, you’ll have some insights on what to do next. 
  • Always read and understand the terms of your loan before accepting any money from a lender so that you don’t get stuck with unexpected fees or interest rates down the road.

You can also compare payday loans to others to see which is best for you. 

When Should I Get a Payday Loan?

Payday loans can be a great option if you have an emergency and don’t have enough money to cover it. But if you’re not careful, you could have trouble paying back the loan on time. So always seek the best payday loans for your needs.

payday loans pros and cons

Remember that you should only use them as a last resort when you need quick cash to pay for an unexpected expense. If you’re trying to use a payday loan to get out of debt or pay off bills, it’s not going to work.

Other ways might be better for your situation. For example, if your employer offers flexible payment options for medical expenses or emergencies, talk with them about what they can do for you instead of taking out a payday loan. 

How Much Can I Borrow From a Payday Loan?

It can range from $500 to $2,000. Still, it depends on how much your lender will approve. 

Usually, you can use their website’s navigation tool to set the amount you’d like to borrow, but that won’t be your approved amount. They’ll still need to check several things, like your proof of income. 

Also, if you’re wondering how many payday loans can you have, you can have as many as you can manage. But keep in mind that they’re temporary solutions, not long-term ones. 

What Are the Other Types of Payday Loans? 

What is a payday loan? The term “payday loan” is usually used as an umbrella term, which means that it can have different forms that function just like it. The following are the most popular ones:

Cash Advance

You can usually get this kind of loan from your employer. It acts just like a regular payday loan since it functions perfectly the same: your employer will give you the cash you need, and it’ll be automatically deducted from your salary. 

The good thing about this is that the interest rates and fees aren’t as expensive as regular payday loans. Also, if you’re borrowing a larger amount, your repayment term can be as long as 12 months. 

However, cash advances aren’t usually just given to employees. You need to be eligible first before they offer you this kind of financial aid. It’s also worth mentioning that not all employers offer this kind of loan.

Credit Advance

A credit advance is a loan you get from your credit union. By far, this is the most borrower-friendly loan with its low-interest rates. Usually, you can only have 1-3% interest per month. 

Also, there’s another kind of credit advance that’s far more convenient than the traditional one: revolving credit. If your credit union has a mobile application, you’ll be able to directly transfer your credit limit to your bank account from your smartphone. 

pros and cons of payday loans

Deferred Deposit Loan

It’s a type of loan offered by banks, credit unions, and other financial institutions. These types of loans are often referred to as “check loans” because they’re basically small advances on the borrower’s future income.

They’re called deferred deposit loans because there’s no repayment until after the borrower has been paid for the work they’ve done. 

Pawn Shop Loan

This kind of loan is a secured one. Unlike the rest of the forms of payday loans on this list, this one needs some sort of small collateral for you to get the money. 

So, if that’s the case, what makes it a payday loan? Well, there are pawn shops that can adjust the repayment term on your payday.

What Are Good Alternatives for Payday Loans? 

The following are some of the best alternatives for payday loans:

  • You can ask your friends or family members for a loan. If they’re willing to lend you money, make sure that you pay them back as soon as possible. Chances are, they won’t impose any kind of interest on it since they’re friends or familial. 
  • You can use a credit card. But credit cards can have high-interest rates and fees, so regular use isn’t recommended. It’s better to use them only when you need cash immediately and don’t have time to wait for an online payment or bank transfer.
  • Consider selling some of your unwanted items. This way, you can easily get rid of things that you don’t want anymore and still get some money out of them.

Conclusion

Payday loans come with great advantages and disadvantages. They can be a bane if you don’t have the capability to repay your loan on time because of their expensive fees and interest rates. They can be a boon if they’ll help you get by with your emergency situation. 

Nevertheless, you should try exploring other methods first before applying for one. Who knows, there might be a friend of yours who’s more than willing to lend a hand or a relative who’s just waiting for you to reach out. 

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