What is a Payday Loan?
Payday loans are a form of short-term lending that can help bridge the gap between paydays or to cover unexpected expenses. These loans are typically small, usually ranging from a few hundred dollars to a few thousand dollars. They are designed to be repaid in full within a few weeks or months.
Payday lenders offer payday loans to individuals who need cash quickly and don’t have access to other forms of credit. While these loans can be helpful in certain situations, they also come with high interest rates and fees, which can make them expensive and difficult to repay.
In this blog, we’ll explore the pros and cons of payday loans, and provide you with tips and advice on the best ways to use them.
The pros of payday loans
One of the main advantages of payday loans is that they are easily accessible. Unlike traditional loans from mainstem banks which usually involve a lengthy application process and extensive documentation, you can apply for payday loans online, and the approval process is usually very quick. This means that you can get the cash you need within a matter of hours or days. Something that can be very helpful in emergency situations.
Another advantage of payday loans is that they are available to people who may have had credit issues in the past. For many traditional lenders, such as banks and credit unions, you need a good credit rating to get a loan. Nor will you need collateral or a guarantor to qualify for a loan.
If you are unable to get a payday loan from other sources, at Hippocash we might still be able to help you with a personal loan.
The cons of payday loans
While payday loans can be helpful in certain situations, they also come with several drawbacks. One of the main disadvantages is the high interest. According to the New Zealand Commerce Commission, annual interest rates on some payday loans can be high, which means you could end up paying back more than double the amount you borrowed.
In addition to the high interest, payday loans also come with fees such as origination fees and default fees. Once you have agreed on a repayment schedule with a lender, money is taken directly out of your bank account. You will incur default fees if there is not enough money in the account for repayments and your bank may also have a penalty fee. These can add up quickly, making it more difficult to repay the loan on time, resulting in even more debt.
Another disadvantage of payday loans is that people can take out multiple loans. Borrowers may rely on payday loans as a quick fix for their financial problems, rather than addressing the root cause of their financial difficulties. According to a study by the New Zealand Federation of Family Budgeting Services, many borrowers end up taking out a number of loans in a row, which then often leads to a debt cycle that is difficult to break.
Although you may not need a very good credit rating, collateral or a guarantor to qualify for a loan, many lenders may require security. This is usually in the form of a wage deduction authority if the borrowers aren’t able to maintain their payment schedules or falls into collections. That means that if you can’t pay back the loan, lenders can give this form to your employer and loan payment plus any fees will go from your wages directly.
Tips for using payday loans
If you’re considering taking out a payday loan, it’s important to use it responsibly so you avoid falling into a cycle of debt. Here are some tips to help you use payday loans responsibly.
Only borrow what you can afford
Before taking out a payday loan, you need to determine how much you can afford to repay in full within the repayment period. You should never borrow more than you can afford, as this can lead to a cycle of debt that is difficult to break. If you’re unsure about how much you can afford, use an online loan calculator to estimate your weekly/monthly payments, and only borrow the amount you need to cover your expenses.
Read the terms and conditions carefully
You must always read the fine print before signing a loan agreement. Make sure you understand everything, especially the interest rates and fees. Some lenders may charge additional fees, such as origination fees, default fees, late payment fees, or prepayment fees. Make sure you understand how much you will be charged and when the payments are due.
If you’re unsure about any of the terms, you can ask the team at Hippocash to explain them to you. If you have further questions about a loan, or still do not understand what you are being asked to sign, you should seek independent legal advice.
Ask for help
If you’re unable to repay the loan on time, contact your lender to discuss your options. Some lenders, such as the Hippocash team, may be willing to work with you to create a payment plan that works for your budget.
Consider other options and explore other funding sources
Before taking out a payday loan, consider other sources of finance, such as borrowing from friends or family, selling unused items, taking on additional work, or you may be able to negotiate a payment plan with your creditors. You may also be eligible for government assistance programmes or financial assistance. In New Zealand, there are various forms of help available for those who are struggling financially, such as the Emergency Benefit and the Accommodation Supplement. You may want to explore these options.
Create a budget
An instant payday loan might seem like a good way to solve your money problems, but it may not be right for you. Sure, it goes right into your bank account and gives you the money you need to pay your rent, buy groceries, or cover car expenses, but if you find yourself relying on payday loans, the costs can seriously outweigh the benefits and cause lasting hardship. A budget will determine how best to deal with your debts.
Ask for financial support or advice
In conclusion, payday loans can be a helpful tool for sorting temporary cash flow issues in between paydays. However, they also come with high interest rates and fees, which can make them expensive and difficult to repay. If you’re considering taking out a payday loan, it’s important to carefully consider your financial situation before making a decision. You may also want to seek help
from a financial counsellor or advisor. You could talk to the Citizens Advice Bureau, go to sorted.org.nz or moneytalks.co.nz for advice or support.
