A payday loan is a small short-term loan, usually of two to four weeks duration, designed to help meet unexpected expenses. A payday loan is a convenient and economical solution to meet temporary cash flow problems, but it is not suited for long-term or continuing financial needs.
A microloan is a loan that has a slightly longer duration, averaging between 3-12 months, and for amounts of $500 or more. These loans are generally used to meet larger expenses such as replacing whitegoods, car registration, rental bonds, dental expenses and unexpected travel.
Reputable lenders such as members of the National Financial Services Federation do not lend to customers without first reviewing your budget, confirming you have sufficient disposable income to service a loan, and then agreeing an appropriate amount and timeframe that meets your needs.
If you have ongoing problems meeting your financial needs or debt obligations, you should first talk to your credit provider before consulting with a financial adviser or credit counsellor [insert link here to list of references].
Guide to Responsible Borrowing
Before seeking a microloan or payday loan, it is important to consider whether they are the most suitable choice for meeting your particular financial needs.
As part of the process of applying for a microloan or payday loan the lender will need to confirm a number of financial details with you such as evidence of your regular income, residential status and three months of bank statements. They will also review a budget including all your financial commitments to ensure you have the disposable income to service the loan.
If you do not have the means to service the credit you are requesting NFSF members will not approve a loan. They may assess a reduced and appropriate level of credit in line with your disposable income or refer you to seek credit counselling advice.
If you have problems managing your finances or meeting your debt obligations, you should first talk to your credit provider and then consider seeking advice from a financial adviser or credit counsellor [insert link here to list of references].
Why do people use microloans & payday loans?
When faced with a short-term cash flow problem due to an unexpected bill, a payday loan can be an effective and efficient option. Microlenders or payday lenders can often quickly assess a loan request and make funds available within a matter of hours.
These loans are usually drawn up for a specific purpose and have a set completion date which many borrowers find helps them with their budget.
In some cases the small cost of borrowing a few hundred dollars for a matter of weeks can help customers navigate a period of unexpected outgoings and avoid potential penalties for late payment on utility bills, credit cards or other time-sensitive payments.
Appropriate use of microloans
Microloans are designed for occasional, short-term use. Microloans and payday loans are not intended to be used continuously, or for long-term large dollar value items.
NFSF members follow rigorous procedures to ensure customers borrow only what they can service. They review a budget, proof of income and the level of disposable income with customers before drawing up a loan.
Microlenders offer “right-sized” loans to customers so they only borrow what they need and can afford, even down to amounts as small as $100. In contrast, most major lenders will only loan $3,000 or more, often in the form of a credit card, which many people find difficult to manage and end up accruing more debt.Although sometimes described as “high interest” loans this is misleading when applied to the actual cost of the loan. Payday loans for example are only taken out for a matter of weeks, therefore applying annual interest rate formula is not an accurate indicator of the real cost. The total cost of cedit is what is important, not the interest rate.
In the case of microloans the period of the loan is normally also less than 12 months so once again an annual interest rate is misleading in explaining the cost of credit.
All NFSF members fully explain the total cost of credit, including all charges and interest, in clear dollar amounts so customers always know the complete cost before proceeding with any loan.
If you find yourself using microloans on a regular basis, you might want to consider independent financial counselling advice to see if you can better manage your money.
Understand the terms of your loan
You should read your loan agreement in full and be sure you understand all the costs and terms of the loan. If you have any questions, ask your credit provider before proceeding. Ensure you receive a copy of each document you have signed.
You should know exactly when your payday loan or microloan is due, and make sure you have sufficient funds in your account on the due date so you do not incur any additional fees.
If your loan goes into default, or is likely to, contact your credit provider immediately to work out a suitable repayment arrangement.
Other options
You should evaluate your financial situation to determine if a payday loan or microloan is the most appropriate choice for you. If you feel you are using short term loans too often or having continuing shortfalls in your ability to meet your outgoings consider seeking financial advice and credit counselling.
NFSF members will not lend money to applicants they suspect will have difficulty repaying the loan amount. Click here for some useful links to community credit counselling services, charity operated financial assistance services and information on getting your financial situation under control.
Help is available
If you find your monthly outgoings and expenses are routinely exceeding your monthly income or if debt stress is making it difficult to cope with everyday life, these are all signs that debt has become a problem.
There are a number of organisations and community credit counselling services who can offer free, confidential advice that can help. There are also tools online to help you assess your budget and get tips on managing credit.
Online Budget Calculator
www.commbank.com.au/Tools/budgetplannercalc.asp
Wesley Mission Creditline
www.wesleymission.org.au/centres/creditline/
Australian Financial Counselling and Credit Reform Association
http://www.afccra.org/counselling.htm
Consumer Credit Legal Centre
www.cclcnsw.org.au
