- Digital payday lending services have experienced a bigger uptrend recently
- New app-based payday lender companies have grown considerably since last year
- Heed precautionary words of advice before delving into these services, experts say
- The Commonwealth Bank now also offers payday lending services of their own
Digital payday loans in 2021 looks to be a continuous uptrend. With a direct collision with the older loan companies and other buy now pay later merchants, they are applying their digital-savvy approach – They are here to claim their share of lending customers.
This runs concurrent to both the present-day economic landscape and existing traditional lending services. But are they out to change the industry with their more modern approach? What’s in it for all types of lenders out there?
We’re going to take a look at how payday loans work. What best practices are to consider so we can maximise our loans and save our wallets too.
What are digital payday lenders offering?
Digital payday loan companies offer a quick, convenient, interest-free, short-term loan, up to $5000 maximum. There are no credit checks or a long list of requirements needed, only the following:
- Australian citizenship or residence
- Above 18 years old
- Source of income or funds (Centrelink, bank account, card)
They are largely in touch with the app crowd; These are mainly younger loaners, but also includes everyone else with a mobile phone who can download the app or apply online.
Once you apply online, you can get the loan almost instantly. Pay the loan within their terms, usually with a certain payback amount involved, as well as the dreaded late payment fees. This is where they usually make their money. It’s an important element that may also lead to the equally dreaded debt trap which we will discuss again later in this guide.
Here are the upfront terms of payday loans:
- Up to 4% on repayments
- Up to 20% for establishment fees
Some of the more popular lending providers out there include:
- Fair Go
The good and the bad of payday lending
Payday loans are similar to buy now pay later plans: Aside from easy application, there are no other fees (except interest rates on bigger loans). You only pay these during the term of your loan. Unlike credit cards, you don’t have to pay other service fees, late payments, annual fees, or go through a thorough credit and financial check when you get one.
Up to 20% of the upfront payment is allowed by the government for charging, however, the interest rates can shoot up to 400% if taken into terms annually. This is why we have to maintain these short terms at the shortest possible time and exit immediately.
The modern approach of digital payday lending is fast and convenient, and all done online. It might suit us better if we know how to follow their terms with the most minimum expenditure. We have to be realistic with the goals and have enough buffer options for repayment.
Payday loans work best when it is for an immediate small amount that doesn’t fit your current budget. It is a short-term loan usually payable on or the next payday/s. The biggest issues here are:
- All fees associated with the service at repayment
- Fees for late and non-payment at the agreed deadline
These two main factors may pose financial dangers to many people. So it is important to accomplish the loan at the soonest.
Words of advice from the experts / The debt trap
If you’ve ever been put on the spot before financially, you know that loan companies are a possible money trap; However, experience over the years has given us insight into how they work. We can use this to leverage their terms to our side, especially before giving these digital payday loans a fair go.
Finance experts advise us to heed precautionary words of advice before delving into these services. Among some of the biggest issues with payday loans, like any others, may come from having no proper time to review and look ahead. This may lead to a domino-effect of the debt trap from fees and interest rates.
As a general guide you can avoid the debt trap and minimise your repayment terms:
- Use the service as a last resort
- Choose the best payday lending company carefully
- Keep loans small
- Make payments in shorter and faster spans
- Make sure that there is incoming money within the loan term
Consumeraction.org’s online report has shown us that a lot of Australians still fall into the debt trap; The last report was from 2019 just before the pandemic hit, and there was already a total of $AUD 1.7 Billion payday loans, and up to that date of the report, there were 4.7 Million loans initiated. At least 15% of those loans still fell into the debt trap. With the aftermath of Covid19, we aren’t even sure how many more Australians fell to that same percentage.
The Commonwealth Bank’s response:
If you can’t beat them, join them
AdvancePay is a similar payday loan service packaged as The Commonwealth Bank’s own short term loan solution. They also have an app just like the other payday loan companies, to offer fast, convenient applications and approvals like them.
Actions speak louder than words, as the digital payday loan companies’ entry into the national loan industry looks like a minor threat response by the majors in the overall competition. This includes them, thus the introduction of a similar loan scheme from a more reputable institution. They are the first major bank to do so.
Their loan program keeps their plan terms low with the following terms:
- $300 to $500 – $5 fee
- $501 to $750 – $10 fee
- Non-payment interest is at 14.90% annually.
- An upfront fee depending on the loan amount.
- Approval also takes one business day to complete.
- You have to be a Commonwealth bank account holder
- Must not be in arrears or hardship status.
These main requirements will most likely be major issues compared to the easier and more lenient terms of their smaller competitors.
What about traditional loan companies?
According to government reports, traditional loan companies are still in the game; Housing loans rose to 5.6% and personal fixed-term loans to 13.2%. When looking at these differences, payday loan companies may still own their place in the competition, due to their main selling points:
- Immediate small loans vs. long term loans
- Easier application process via online and app
- Faster approvals within minutes to a few hours
- Less requirements and no paperwork
- Bigger financial risks involved with bigger loan amounts, fees, and bank interest rates
In review, payday loans look to continue maintaining a high standing in the future as they own their place at the moment. While bank-owned apps like The Commonwealth Bank’s AdvancePay are now present, their dissimilar terms and requirements are still not at par with what the smaller competitors are offering. They also appeal to different types of loaners, compared to those who use older loan companies who have long terms and bigger loan amounts.