What’s the Deal With Pay Day Loans?

Is it just me, or have there been A LOT of ads on recently here in Australia for payday loan companies? My boyfriend and I were watching TV last night and an ad came on that spruiked the benefits of a short-term cash loan for a bloke caught short the pub.

At. The. Pub. Dude, if you haven’t got $20 to buy a round of drinks, then you shouldn’t be drinking.

Needless to say steam started coming out of my ears and my poor boyfriend had to sit there while I ranted about the company taking advantage of young, impressionable males.

It was in this state that I decided to do a little research into the history of pay-day lending in Australia, and it’s pretty interesting stuff.

It seems like the market is quite new, but the first payday loan company actually first popped up in Australia in 1998 and by 2001 there were 82 payday lending businesses offering around 12,800 loans per month. The amount of short-term loans has only continued to rise, and the industry is now worth an estimated $1 billion.

1 Billion Dollars Meme Dr Evil

It’s been well-documented that payday loans attract sky high interest rates – when taken into account the application fees and interest charged – and an almost immediate due date. This makes it difficult for people who are struggling to get out of the cycle of borrowing against high-interest, short-term loans.

The government has set the maximum amount that these lenders can charge for a loan, capping establishment fees at 20 percent and monthly fees at 4 percent. Of course lenders can also tack on other fees, including late fees and other charges – which can be as high as $35 for a dishonour fee and $7 a day late fee.

Because the numbers are so small, the amounts don’t seem so scary. Say I just need $300 to get me through the weekend. Running the calculations shows I’ll only have to pay back $186 in two payments. That seems pretty doable and not scary. But it does mean paying a total of $72 in borrowing costs. For a 21 day loan!

The stereotype is that these loans are taken out by people with only school-level education, and almost no awareness of what paying back the loan will actually cost them – often receiving government payments and don’t have (or don’t qualify) for other forms of credit. According to the 2012 research report Caught Shortalmost all borrowers used the loans to pay for essential items such as food, rent, car repairs or utility bills.

But the recent rise in online only lenders has seen the demographic shift from low income earners to the more wealthy. Nimble company chief Sami Malia told SMH that their typical customer earned $65,000 and was about 34 years old. He said there were some borrowers who earned more than $100,000.

Nimble’s advertising is fun and upbeat, using quirky situations (a sauna instead of an engine in your car – how hilarious!) to showcase their product. They’re at pains to point out it’s a short-term loan, rather than a ‘pay-day loan’. Oh and they stress how fast and easy it is to get the money – within the hour for most borrowers. They even offer a Visa PrePaid card which can have your future loans with Nimble paid onto it immediately (because of course you’ll have more than one).

It’s very easy for many of us to sit here and question why someone would take out a short-term loan. But for those people feeling the pinch, a payday loan can seem like an easy option. And we run so much of our life online now, so applying for a loan can feel very intuitive.

So What’s the Alternative?

Short-term loans are the perfect example of why you need to have an emergency fund – if you’ve got $2,000 sitting there in an account then you’ll never need to take out one of these loans.

Of course, there’re other options – sell your stuff, pick up some overtime, get a second job. If you need to pay bills then get in touch with your utility providers and negotiate an extended payment plan.

And if you have taken out a short-term loan, do whatever you can to pay that sucker back on time, then work on building up an emergency fund so it doesn’t happen again.

My Final Thoughts

It’s easy to blame the predatory practices of payday lending companies – those ads also highlight the ‘quick and easy access to money’ part of the deal, not the ‘high rates of interest and ridiculous payment terms’. But when credit and debt is so normalised, it’s hard to push against that set your own path.

The ad with the two blokes in the pub shows how much of an influence our friends have on our own finances our approach to debt or saving money. I don’t believe the answer is to just shame people who get themselves into debt, but to help them see that there is an alternative to borrowing to fuel a lifestyle that many of us can’t afford anyway.

What are your thoughts? Have you ever had to take out a payday loan or known someone who has?

Money Talks – PayDay Loans

Have you guys seen John Oliver, host of Last Week Tonight? He’s the thinking woman’s talk show host and I love how he covers topical issues using humour and satire. I was going to post another clip this week, but then I came across this episode on PayDay Lenders.

PayDay Lending isn’t as prevalent here as it is in the US, but does still exist and seems to be growing. It is a service that targets the most vulnerable people in our society, trapping them into a cycle of borrowing that they may not ever be able to get out of.

Even if you’ve never needed to access a short term loan, it’s still important to understand exactly why the system is so horrible and how these companies benefit at the expense of others.

If you can’t see the video in your email head through to the blog or click here to check it out on YouTube.

I’ve been checking out a few blogs around the place this week. Here are a few of my favourites.

Although I don’t think that money is the answer to happiness, well-considered purchases can bring us happiness beyond their monetary cost. NZ Muse wrote about the material things that she’d spend money on.

I have a secret love for reading organising blogs (what,were you expecting me to admit to reading the Twilight books, ha), but so many of those posts are geared towards homeowners. So this is a great roundup post from IHeart Organizing of non-permanent organisation things you can do in a rental.

I’ve talked a bit about budgeting here and I often change how I budget depending on what’s going on in my life. This post from L Bee & the Money Tree outlines some of the common types of budgets.

Finally, here’s a great article from Mindy Crary over at GoGirl Finance on how you should take charge of your career for the better.

In other news, I’ve been getting super into Instagram recently – it’s my new social media obsession. You should totally follow me (you know, if you want).