We’ve probably all heard of payday loans, and we’ve probably all heard of why they’re a bad idea. But when we’re in a desperate situation we’re often willing to take more risks, and ignore future problems just to alleviate the immediate pressure. So let’s look at those future problems.
What are Payday Loans?
Payday loans are short-term loans with high-interest. These loans are supposedly designed to be paid off very quickly, ideally within the next few weeks.
The apparent purpose of these loans is to enable people to meet an important, short-term cost. Maybe your car broke down: you need $500 to fix it, but you don’t get paid for another two weeks.You might borrow $500 with the understanding you’ll be able to pay back the loan amount within only four or six weeks..
Payday loans are usually extremely easy to get. Some lenders don’t even require you to pass a credit check to qualify for one. This should set off immediate alarms for you, because companies operating in New Zealand are required by law to be responsible and ensure any client is capable of paying back a loan.
When your car breaks down you can go into one of these places with nothing but your ID and bank account number, and come out in a matter of minutes with money in the bank and a promise to pay it back within the stated term.
Pay it back, or else…
The amount of interest charged on payday loans makes it an extremely risky bet.
Using our previous example, the lender might expect you to pay $590 within only a few weeks. If you have a spare $590 in your budget, fine. But $590 is a lot of money to draw from your wage. What happens if you can’t make the payment?
Payday loans have extremely high interest, and it’s not unheard of for a lender to charge 500% or more. If you can’t make your payment, interest will be charged on the loan amount everyday. In a week $590 becomes $730. If you can’t pay that, it’s $850 a week later.
As you can see, these loans can get out of control very quickly!
The Debt Cycle
It’s almost payday and you know you won’t be able to pay $590. Not to worry though, the lender says you can roll what you owe into a new loan for a small fee. With your due date extended, you’ll avoid all the penalty fees.
Not so fast though. Because your $590 you avoided paying today becomes $700 on the new due date.
This can be an attractive option in the face of missing payments, but the relief is extremely temporary. It’s not even a band-aid. It’s a soggy band-aid you found at the bottom of the pool.
There’s a Fee for That!
Perhaps the most amazing thing about payday lenders is their creativity. They can come up with a fee for anything!
Want to borrow money? Fee.
Set up a direct debit? Fee.
Make a payment? Fee.
Miss a payment? Fee.
Cancel a payment? Fee
Extend the loan? Fee.
There is seemingly no limit to what they can charge you for.
Being in debt is tough. It takes an incredible toll on your physical and mental wellbeing, and it can often feel like being in a deep hole. And when you ask for help, people just throw you a shovel and tell you to start digging.
But with careful planning, a little help, and knowing how to spot and avoid the predators who prey on your vulnerability, you can make it out. Our financial mentors can help you with anything you need to understand your financial situation and options, from simple advice to connecting you with relevant agencies.
Phone: 0800 345 123
Live chat: www.moneytalks.co.nz
We are available to help Monday to Friday 8am to 8pm, and on Saturdays 10am to 2pm. We are here to help you.