How Do Payday Loans Work?

By Nagamani On Feb 12, 2022

Payday loans are small-dollar, high-fee loans that help borrowers cater for cash emergencies until their next paycheck. Typically, payday loans in Australia come with triple-figure Annual Percentage Rates, and their payment terms are extremely short—until your next paycheck.

However, these loans are not for the fainthearted. Repaying them can be challenging, and one could end up paying more than previously anticipated due to penalties. Therefore, before applying for a payday loan, ensure that you understand what you’ll receive and what you’ll give in return.

How Do Payday Loans Work?

While payday loans can be a quick solution to cash-strapped customers, they come at a high cost and can be a financial burden to most borrowers.

But how exactly do payday loans work?

To access payday loans Australia, you’ll need to visit payday loan matching websites like Viva Payday Loans. They’ll then complete an online form, which takes about five minutes. Usually, applicants must produce their IDs, payslips, and bank account.

The loan amount may vary between $50 to $1,000, often higher, based on the loan policies of your state. If your application is accepted, you may receive the amount instantly, or it’ll be transferred into your account on the same day or within two working days.

The lenders impose interest ranging between 15% – 20% of the borrowed amount. At the same time, the APR can vary from 391% to 521% or more. The repayment terms may also vary but usually are less than 12 months.

The applicants can pay the loan in various ways:

Post-dating the check to match their next payday or
Give the lender access to their account to withdraw the cash when the loan is due.

What Happens If You Can’t Repay Payday Loans?

If a borrower cannot pay back the loan within the agreed time, they can request their lender for a loan “rollover.” If their wish is granted, they’ll be asked to pay the due fees and extend the loan term.

For instance, for a loan of $375, the borrower will owe the lender $56.25 if a 15% interest rate is applied (the lowest rate). This will amount to $431.25 at the end.

But if they request for “rollover,” the amount would go up to $495.94. If you add it to the loan fee of about $64.7, it will accumulate to $495.94.

How Payday Loan Interest Rates Are Calculated

To calculate payday loan annual percentage rate(APR), divide interest paid by the borrowed amount and multiply it by 365. Divide the result by the payback period and then multiply by 100%.

For example, calculating the APR on a $375 loan will be:

56.25/375 =0 .15 x 365 = 54.75/14 = 3.91 x 100% = 391%.

On a $375 loan, the $20 per $100 borrowed (or 20%) is calculated as 75/375 =0.2 x 365 = 73/14 = 5.21 x 100% = 521%.

Furthermore, the APR is significantly higher than any other alternative financing option. Even at the highest credit card rate, a payday loan will cost you less than a tenth of what a credit card would cost.

Payday Loan Alternatives

Most individuals often take out payday loans regardless of how they cause most consumers to go into debt.

However, alternatives to payday loans can help you get off the debt hook. Let’s briefly discuss some of them, shall we?

Paycheck Advance

Many organizations provide employees with the opportunity to receive their income before their next payment is due. For instance, If an individual needs quick money to solve a problem but the paycheck isn’t due, the employer can provide some cash for the days the employee has worked and later deduct when the payday arrives. This isn’t a loan; it will be taken from your next paycheck.

Peer-to-Peer Lending

If you cannot access payday loans and still have trouble finding a way to get money, you need to look into peer-to-peer lending websites. The loan rates are around 35 percent, significantly higher than the 6 percent rate folks with perfect credit get. Besides, 35 percent is better than the 391 percent offered by payday lenders.

Credit Unions and Community Banks

Credit unions and local banks can now issue loans with more flexible payback conditions than major regional or national banks. Their interest rates vary between 10% -12%, in contrast to payday loans which range between 400-500%. For more inquiries, you can contact or visit them.

Debt Settlement

Are you constantly out of cash due to unsecured debt? You may want to consider debt settlement as your relief alternative. Debt settlement entails agreeing on a lower payment than whatever you owe; nevertheless, it leaves a significant mark on your credit record and has a considerable impact on your credit rating.

Lending From Family Or Friends

Financing from friends or relatives is a quick and frequently the cheapest option to get out of a jam. With this lending option, you can have a more extended repayment period plus a lower interest rate, but ensure it is a business arrangement that benefits both parties. Establish a contract that spells out the loan conditions, and adhere to it lest you impair your friendship.

Bottom Line

Payday loans help individuals get cash quickly whenever they are in dire need; however, they aren’t the only choice. If you require money, think about all of your alternatives before choosing one that would lead you into future financial troubles.

If you have terrible credit, examine your credit rating and report to see what areas you need to address. In rare situations, there may be incorrect information that, if eliminated, might improve your credit score. In other words, think about how you’ll raise your credit score to enable you to borrow more in future and pay less interest on credit.