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Payday loans: when you should and shouldn’t use them

PayDay

Life can be unpredictable, particularly when it comes to expenses. Something as simple as a flat tyre or broken washing machine can throw your budget out fast.

It’s these kinds of urgent and unforeseen expenses which payday loans, also known as cash loans, are often suitable for.

They are designed to give you access to cash straight away, while allowing you to pay back the amount in full on the following payday or partially over several paydays. It’s from this that payday loans take their name.

This article looks at when it is and isn’t appropriate to apply for a payday loan.

Payday loan restrictions

There are a number of restrictions on who can and who cannot apply for a payday loan. This is because payday lenders are required, by law, to lend responsibly. Therefore, a payday lender should not lend to you if they feel you are unsuitable for a loan of this type.

For example, if your bank statements show numerous reversals or dishonours, or if you have another small loan active, your loan will most likely be automatically rejected. Also, if your income is derived solely from Centrelink, then your application will not be accepted.

When you should use a payday loan

Payday loans can, technically, be used for just about any small expense. Provided you meet the lending criteria as outlined above, there are no restrictions on what you can and cannot use the money for.

That said, there are definitely situations which suit payday loans better than others. These situations often include unexpected or unforeseen expenses.

Examples:

  • Emergency car repairs
  • Broken home appliances
  • Costs associated with medical care

You’ll notice that these examples are one-off expenses, not recurring costs. That’s an important distinction which we will delve into deeper below.

It’s worth noting that unlike a credit card, which accrues compound interest, your payday loan repayments remain the same. This is because cash loans calculate repayment costs using fees rather than compound interest. The benefit of this is that you’ll know exactly how much is due each week and when.

When you should not use a payday loan

Payday loans are designed to cover unexpected costs, while also providing a manageable repayment plan.

Ideally, your payday loan repayments should slot into your weekly budget like any other regular payment, such as your rent, phone or mortgage costs.

Therefore, if you’re looking at paying your payday loan off over several paydays, then you should avoid ‘doubling-up’ by using your payday loan to pay for another regular expense.

What do we mean by this?

We mean, do not use a new debt (payday loan) to cover an existing and ongoing financial commitment. These financial commitments can be varied but often include the following.

Examples:

  • Rent payments
  • Utility bills
  • Membership fees

Should you take out a payday loan to cover these recurring costs, come the next billing date, you will have to pay both the initial payment along with the repayment for your payday loan.

This can lead to bills building on top of bills and should be avoided.

Payday loan alternatives

If you need an extension on a regular payment, speak to your lender or provider first.

Often utility suppliers, such as electricity, gas or water providers, can reschedule your repayments to overcome a temporary shortfall in cash-flow.

Similarly, your bank or lender may be able to help you to reschedule your loan should you have trouble meeting your repayments on time.

If you’re having difficulty meeting an existing payday loan, contact your payday loan provider. Lenders will sometimes allow you to reschedule your payments to match your financial situation.

Summary

To conclude, a small cash loan from a responsible lender, can be a convenient and fast way to cover a one-off unexpected expense.

However, before applying it is important to consider the alternatives and whether there is the potential for ‘doubling-up’ of repayment expenses.


About the authors

This article was provided by the team at payday lender, Club Money