Is a payday loan ever a good idea?

I am working on a case at the moment where a gambling addict got small loans from Nimble and got into dramas with them. Gambling addiction is a shame-based addiction where impulse control is inhibited around gaming.

If a payday loan turns sour it can be listed on a credit file, which has the effect of not only showing an inquiry listing from the payday lender, but also showing a default. It’s simply not a great idea to have either of these listings on a credit file when it comes to applying for finance.

When I looked into my client’s situation, it became really clear how payday lending can go from bad to worse quite quickly. The fees and charges, particularly if you cannot pay the full amount of the debt on the due date, are crippling.

So here is the scenario: the client sought out a payday lender for a loan of $765. Straight up, the client only received $600 in the hand (that’s called the ‘principal’). So before the ink is dry on the contract, $165 has disappeared in an establishment fee that stays with the payday lender.

But the client’s credit limit was set at $795 and could go up to that limit at any time, as long as they paid the $45 drawdown fee each time (I must be fair and say there is no interest payable on these ‘advances’).

The ‘principal’ of $600 is due one week after the loan is approved (at the next pay day, hence the name of these loans), but my client’s liability is $765 (even a gambler would think the odds are not looking good).

My client could not afford that amount when the due date arrived and instead paid $490. This is when the fees and charges kicked in.

By only making a part-payment of $490, the client was charged $30 every week they had an outstanding balance on the account after the initial drawdown. In addition, as their payment was only a part-payment, a payment dishonour fee of $35 applied. As well, there was a default fee of $7 per day as a daily recovery fee to cover costs of administering the account while it remained in arrears. Adding this up, while in arrears, extra fees totalling $114 were added in the first week, and $79 each week thereafter.

The statement of fees and charges my client received had got to a point where all fees, plus the principal of $600, totalled $1,150, and escalating. And when next pay day came around, it was pretty certain there was no circumstance by which my client’s wage could rise to match it.

The annual interest rates on payday loans in Australia is estimated at around 97 per cent, which is much better than the UK where before the Financial Conduct Authority started its crackdown on the industry, loans were written at up to 5,000 per cent interest. But even 97 per cent is still pretty crippling for the average Australian consumer.

My advice: If you see a client caught up in payday loans, refer them to a financial advocate, debt negotiation company or financial counsellor for help to work through their issues. You may just help to nip things in the bud so it doesn’t all end in tears.

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