Alternatives to payday loans

The payday lending industry is booming in Australia, and it’s driving thousands of Aussies into a debt trap. And it’s just not here. An increasing number of people around the world are relying on these unsecured loans as a quick fix when they need extra cash, despite regulators’ repeated warnings about the dangers of payday loans.  

Admittedly, payday loans are helpful options to settle urgent needs, especially if you have been refused by traditional lenders because you have a low income or you don’t meet their specific requirements. Payday lenders are known to accept applications from customers with a poor credit history or have low credit scores, making these loans easily accessible to the majority of Australians. The very short loan terms offered by these lenders often mislead consumers into thinking it will be something they won’t have to worry about in a few weeks or so. 

Payday loans are convenient, but that ease of borrowing comes at a high price.

Like everything that sounds too good to be true, payday loans have a catch. They charge high interest rates, which means you could end up paying a lot more than you borrowed more than with any other type of loan. 

Payday loans are notorious for trapping borrowers in an endless repayment process that damage their credit history. You could face expensive penalties if you miss your repayments.

A payday loan can adversely affect your credit score if you fall behind on repayments or default on the loan, which could harm your applications for other lines of credit in the future.  

So, before you start applying for a payday loan, you should know what options you can consider when you need a quick financial fix. 

What are your other loan options? 

If you urgently need to borrow money to settle a bill, pay your creditors or for other emergency expenses, there are better options than supporting the seemingly predatory payday lending industry. 

Depending on your personal circumstances and how much you need to borrow, there are alternatives to visiting a payday lender. Not all of these options will work for you, but they are considered to be cheaper borrowing options that won’t put you in a vulnerable position like with a payday loan. 

• No interest loan – A no interest loan or a NIL lets you borrow up to $1,500 to pay for essentials. Repayments are affordable and the loan term is between 12 and 18 months. There are no credit checks and you will not be required to pay any interest fees, or charges. Simply put, you will only repay what you borrowed. These loans are available from certain banks for low-income households to cover agreed services, including medical care or training. 
• Low interest loan – If you can afford to pay a little interest, you may consider taking on a StepUP low interest loan. People who have difficulty borrowing from banks are eligible for this loan, which allows them to borrow between $800-$3,000. It has a fixed interest rate and can be paid back at three years maximum, with weekly, fortnightly or monthly repayments. Like NILs, no fees are charged.
• Centrelink advance payment – You can request a lump-sum payment in advance from most Centrelink benefits. If approved, you may be given part of your benefit in a lump sum. However, you must later repay the amount. This is useful if you need a large amount at fixed periods throughout the year rather than getting a regular income. The loan term can vary, but most payments must be repaid within six months. The amount you can borrow will depend on the type of Centrelink payment you receive, but it is usually limited to the amount you are capable of repaying within the term. The best thing about this loan is that no fees and interest rates are charged.  You will be required to provide proof that you can repay the money without experiencing financial hardship, so prepare your proof of income and details of expenses and liabilities. If you want to apply, you can visit the Services Australia’s website.
• Non-conforming loan – Due to our different personal circumstances, we don’t all fit into traditional lending categories. If your financial situation makes it difficult for you to get a stamp of approval for a loan from banks or credit unions, a non-conforming loan or non-bank loan can be the answer to getting the money you need. You will still need to be assessed before your loan is approved. But on the bright side, non-confoming lenders tend to have a different approach towards borrowers and are perceived to be more considerate of your circumstances. These loans usually have higher interests than your run-of-the-mill loan, but still have a lower interest rate than payday loans. You can also borrow a higher amount than conventional loans.
• Debt consolidation loan – Are you struggling to pay back multiple loans?  You can combine your debt (including credit card debts and other payments) into a single consolidation loan with a more affordable monthly payment. The interest on a debt consolidation loan will be significantly lower compared with payday loans, making monthly payments more manageable. You are also given a longer period to repay it, usually 12 to 84 months, rather than within two weeks. Unlike a payday loan, these types of loans are regulated, which means having a good repayment track record will help you improve your credit score over time. 

What are your other practical alternatives to payday loans?

Let’s say you don’t want to go through the process of applying for the mentioned loans. Maybe you find it too tedious or you just don’t have the patience to wait for an approval. Here are other practical options you can try to get money fast: 

An advance payment from work

Some companies offer financial or loan packages for their workers to help them through tough financial times. You can apply for an advance payment if your organisation offers such service. If not, you can talk to your boss and explain your circumstance. 

Dip into your savings or emergency fund 

If you have saved up money for an emergency, you can use your savings rather than take out a payday loan. Remember to only use this if it is truly an emergency. Try to replenish your emergency fund as soon as you can. 

Help from your family or a friend

While it might be awkward (and sometimes embarrassing) to seek financial help from your family, friends or even your colleagues, it may be your best option to deal with financial emergencies. The people closest to you will likely be the ones who are most understanding about your financial situation and will be more considerate about helping you. Be honest about why you need the money. Set a repayment plan before borrowing and follow it through. 

Though this may seem like a last resort, it is still a better solution than falling into a debt trap of payday loans. If you choose to do this, be diligent about paying them to avoid putting your relationship in jeopardy. 

Negotiate your utility provider or creditor

Don’t be intimidated by the idea of negotiating with your creditor or utility provider if you have a problem with paying your bills or debt. In most cases, they will understand if you have any financial issues. If you have a temporary cash flow problem and you can’t pay your rent for the month, try talking to your landlord. If you know you can’t pay your power bill, contact your creditor. Ask them if they are open to extending your due date or you may reach an agreement on a more lenient paying scheme. You’ll never know until you try. 

Learn more about loan options and repayment strategies on our website. Explore nestegg today!