If you don’t have any savings, an unexpected expense such as, the illness of a child, emergency medical work or the breakdown of a vehicle or home appliance — can create family budget stress.
This can be particularly so if you have a poor credit history and are unable to borrow to cover the expense. If you are in this situation and can’t borrow the money from a friend or family member, you may be considering taking out what’s known as a ‘payday loan’.
How they work
A payday loan is a small amount of money that you borrow to cover your expenses until your next pay cheque. The theory is that as soon as you get paid, you can repay the loan, plus interest.
The lender doesn’t do a credit check, which means you can get the money straight away. This makes it a popular option for people who can’t get credit from traditional lenders, such as banks, or for those who need money fast.
The cost of payday loans
While this sounds like an easy solution for your immediate needs, there are some dangers within payday loans that you should consider.
Firstly, the fees and charges on these kinds of loans can be considerably high. This is largely because they are a high-risk loan for the lender — without collateral or a credit check, there is no real guarantee that the borrower will be able to pay them back.
The other problem with these loans is that your next pay cheque may not leave you with enough money to pay the loan and interest back as well as cover your next week’s expenses. This could create a vicious cycle of more loans, with more interest — and an even bigger debt.
What are your options?
Here are some alternatives to taking out a payday loan:
■ Negotiate to pay your bill later, or in installments.
■ If you are on a very low income or receiving Centrelink benefits and you need an essential item such as a washing machine or a medical treatment, you can apply for Centrelink or non-profit loans which can be low or no interest advances or loans.
If managing your debt is an ongoing problem, it could be helpful some professional advice from a debt management expert, who can assist you in sorting out your finances.