Everything You Need to Know About Bad Credit Payday Loans

Applying for a payday loan is a quick and easy process. Many lenders deposit the funds into your account within a few hours after your application is approved. Some lenders even loan you money despite your bad credit history. But are these loans worth it and are there any risks associated with these loans? In this post, we will explain what you need to know about payday loans.

What are payday loans?

Payday loans are short-term, small-amount loans, typically ranging from as low as $500 to up to $2,000. They are unsecured loans, which means that you don’t need collateral to get approved for them. The reason why they are called payday loans is that they are designed to be repaid by the time you receive your next pay cheque. But some types of payday loans can be for longer terms – up to six months or even a year.

The good news is that these loans do not require a lot of documentation as usually lenders only ask for proof of identity, proof of income, and bank account details. So, even if you don’t have a credit history, you can easily get such a loan. The bad news is that while it can be easy to get a payday loan, lenders usually charge exorbitant fees for them. In Australia, payday lenders are not allowed to charge interest on the money they lend, so the lenders earn their income by charging high fees on the loans. The comparison rate on a typical payday loan can be as high as 200%. You need to be aware of the following types of fees a payday lender might charge, depending on your situation:

Establishment fee:

The establishment fee usually amounts to 20% of the amount loaned. The fee is capped and can’t exceed the 20% limit.

Monthly fee/ Account keeping fee:

The monthly fee or account keeping fee usually equals 4% of the loaned amount and is charged every month. Like the establishment fee, this fee is also capped at 4% of the borrowed amount.

Default fee:

Default fees are charged only if you miss your repayments and can be as high as 200% of the amount of the loan. The fee often also includes costs related to the recovery of the loan in case a customer defaults or doesn’t pay back the loan by its due date.

What are bad credit payday loans?

Bad credit payday loans are for those borrowers who have a bad credit history. So, if you are in dire need of cash for meeting your urgent short-term requirements and banks decline your loan application, you can consider taking bad credit payday loans. Bad credit payday lenders approve or reject your loan application after checking your ability to repay the loan, instead of assessing your credit rating. This means that you can get a loan if you can prove that you have a regular income and are not overburdened with other debt.

How do payday loans work?

To apply for a payday loan, you need to have proof of identification, such as a driving licence, government-issued ID card, or passport; proof of residence, such as a utility bill having your residence address; and proof of income, such as your pay slip – if you are employed; or a bank statement showing an income. Payday lenders have online portals where you can create your account and apply for a loan. You can electronically upload the documents for lenders to review. After your application is approved, the funds are instantly transferred into your bank account.

You have the option to set loan terms and the amount of loan you want to borrow. Some lenders can set up automatic deductions from your bank account for repayment day to recover the loan instalment timely.

What are some alternatives to bad credit payday loans?

Payday loans can be very costly as the comparison rate on them can be up to 200%. So, you should look for alternatives to payday loans if you want to avoid paying exorbitant interest charges or loan fees. Here are some alternatives that you can consider:

  • Consider borrowing money from your relatives or friends. You can save plenty of money on interest charges and fees even if you pay some interest on your loan to your relatives or friends.
  • If you are drawing Centrelink benefits, you can ask for interest-free advance payment of your benefits, which can help you meet your urgent cash requirements.
  • You can consider taking out a personal loan as it is generally cheaper than a payday loan. But personal loans are available for longer terms than payday loans and provide you with larger sums of money.
  • If you need to take out a payday loan to pay your utility bills, you can consider contacting your service provider for deferring your bill to a later date or divide your outstanding bill into manageable instalments.
  • If you are a low-earner, you can opt for a No Interest Loan Scheme (NILS). Over 170 local community organisations in Australia offer NILS loans at no interest rate with loan terms of 12 to 18 months.

Do payday loans impact your credit report and credit score?

Payday loans appear on your credit report, so you should be wary of the number of payday loans you take. Also, when you apply for a payday loan, the lender might make a hard credit check, which can lower your score. If you have plenty of hard credit checks and frequent payday loans on your credit report, your prospective lender can consider it as a red flag. Your credit score will also be impacted by whether you make repayments timely or delay them.

Final Thoughts – Should you take payday loans?

While payday loans are easy to get and can conveniently help you meet your urgent cash requirements, they can be extremely costly. So, if you are struggling to manage your finances, payday loans can aggravate your situation as repaying them can be more troublesome for you. You should always consider cheaper options and take payday loans only as a last resort.

B M Peachey

B M Peachey, has over 15 years of experience investing in property and the stock market, in both New Zealand and Australia. She has a post-graduate degree, with qualifications in Finance and Mortgage Broking and in Accounting and Bookkeeping. She is passionate about ensuring people have access to credible, reliable, and easy to understand information to help them get in control of the life they REALLY want to live.

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    Disclaimer: The information in this article is general in nature as it has been prepared without taking account of your specific objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstance before acting on it, and where appropriate, seek professional advice from a finance professional such as an adviser.