If you’re short on funds to pay a scheduled bill, if unexpected expenses come up (car repair, medical, vet bills), or if you’re just looking for a top up to increase the holiday budget, payday loans appear as an easy fix. Before we delve into the payday world and how it can affect your credit file, let’s consider the product itself. A payday loan also known as SACC loan (Small amount credit contract) is a short term personal loan usually up to $2000 in credit. Charges for each company vary, but they often attract high establishment fees and interest rates. See more regarding the guidelines of SACC loans through Legal Aid NSW. Did you know that payday lenders can charge up to twice the amount borrowed in interest? This means you could be looking to borrow $1,500 to cover a mechanic bill; but end up paying $3,000 back- not including additional fees^.
Some Payday lenders will put an enquiry on your credit file when you click the “Apply Now” button. This means for five years you’ll be able to see that a payday enquiry was made under your name. Enquiries are not a be all and end all situation; however it is something lenders and banks consider during the application process. Click here to read more on what information stays on a credit file and for how long. These lenders can also report repayment history on a file, much like other larger loans- you may have heard “that missed payment on my car loan could affect my credit”– these can have the same effect. In essence, payday enquiries and repayment history do affect your credit history for some time; even if you did not proceed with the enquiry, or even if the facility is since closed.
As mentioned above; all of these SACC products attract high interest rates and fees. They are advertised based on the convenience, and not on what comes out of your bank account each week or fortnight. EG: You get the funds quickly, pay them off in a shortened amount of time- meanwhile the lender is stinging you up to a whopping 20% while still charging you on the original amount borrowed as opposed to the remaining balance. Most people are in an urgent situation when they need a short term fix of funds, and don’t take the financial impact it can have later down the track. All too often, customers can find themselves in a “SACC spiral” meaning they take out additional loans to pay back the first one and so forth. The repayments can catch up quickly- especially when dishonor fees are involved – both by the lender and sometimes your bank too.
Trending Buy Now Pay Later (BNPL) products have skyrocketed over the last 2 years as consumers are formed to “lower the cost”. How many times have you heard “Just Afterpay it”?. Yes, the initial cost is lower as it is spread over a certain amount of fortnights, but have you considered the implications this can lead to down the track? Essentially, a BNPL account is a revolving line of credit- the company pays the upfront cost of the purchase while it’s paid back over instalments by the customer via direct debit. Fees can add up if a payment bounces, and the missed payment history is also then added to your account. Knowledge around BNPL accounts affecting mortgage applications is also increasing- see recent article by Savings.com.au that explains they need to be factored in when applying to some banks.
Simple awareness and education as to what and how facilities can affect you will ensure you’re making the right decisions to protect your credit file. There are options such as no interest loans, and government schemes that may alleviate your need to approach a cheap and nasty SACC loan. If you’re needing urgent funds- consider discussing options with a broker. There are lenders who can offer amounts within the SACC space, but won’t affect your credit history as heavily. Also; take time to work out if you’re able to afford the repayments with interest and fees included with a payday loan calculator.
^This will include default fees, but does not apply to solicitor’s costs of court costs. See ref: https://www.legalaid.nsw.gov.au/publications/factsheets-and-resources/credit-law-toolkit2/the-credit-law/payday-lending-fringe-lending
Rowdie has been a part of our Team since 2020. He has witnessed firsthand the ongoing evolution of the finance industry as technology continues to change the way customers' access financial services. He has a passion for helping people and relishes the opportunity to work alongside our teams every day as they help our customers financial dreams come true.