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What to Be Wary of When Using a Payday Loan

Every now and then people have cash flow problems and we feel that we need some cash as quickly as possible. In this situation one possible solution that presents itself is a payday loan. A payday loan is an advance on your pay cheque which for a fee can be lent to you by a lender. The fee is designed to be a prepayment of the interest applied to the loan and the principal of loan is repaid when you are next paid by your employer.

Some of the advantages of payday loans are:

  • The opportunity to free up a small amount of cash
  • When the fee is less than the fees you may incur for late payments of outstanding debts.

While there are benefits to these short term loans, it pays to be aware of the possible consequences and risks involved. This is especially the case if you fail to repay your loan on time as payday loans tend to be very expensive in this situation. To be approved for a payday loan you will often have to authorise a direct debit from your savings account on the day you are paid by your employer. If you stay disciplined and have the money available there should be no problem. However, if you fail to pay back the money on time you could be charged with significant interest.

One of the risks of payday loans is that your automatic authorisation could be rejected because of insufficient funds. You need to ensure that the money is available when you arranged for the lender to recover the money. Failure to do so could result in significant consequences, such as:

  • You will have to pay a dishonour payment fee to your bank
  • You will have to pay a fee to the payday loan money lender
  • You will have to pay any penalty fees for late payment of the loan
  • You will have to pay penalty interest on any debts that haven't been paid

As you were applying for a payday loan in the first place you are probably not in a position to afford these additional costs. Having to incur all four fees will just add to your financial burden and lead you further into a spiral of debt. In this situation, you are in essence accepting a pay cut on your salary because you never end up receiving you full pay. A portion will always go to the payday loan money lender.

These are the risks of failing to manage your money properly, so a payday loan is only recommended if you can guarantee that the money will be available for repayment. Also further trouble could occur if you apply for a payday loan outside of the reputable lenders.

As there are many companies offering payday loans it is difficult to know which one to choose. Consequently it is important that you pay close attention to the terms and conditions of the loan before you apply. Some terms and conditions to avoid include:

  • A lack of complaints or fulfilment processes in place in the event of hardship
  • Very harsh penalties on late payments with no 24-48 hour respite periods
  • An assurance that negative marks will be placed on your credit report in the event of a late payment

Most reputable payday loan lenders only begin to issue fees and penalties after a delayed period to ensure that you can fulfil your repayments within a reasonable time limit. However, if there is a good chance that you might default on your payment then it is not recommended that you take out the loan in the first place, as the costs can far outweigh the benefits.

If you would like to find out what options are available to you then fill in the following form or call Debt Relief on 1300 781 034 and our staff will assist you.

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