Ads have popped up lately all over the place for a service I won’t name. They suggest that you’re accessing a quarter of your pay without any strings attached. But money and loans just don’t work like that.
Their website says ‘These are your earned wages, use them at your own discretion’ and goes as far as adding that it is ‘similar to an ATM.’ But make no mistake, this is a payday loan. You are accessing debt, not your own money. This latest iteration just puts lipstick on a pig.
If you haven’t been paid yet, then reaching out for money that hasn’t yet landed into your account is usually going to cost you. In this particular case it will cost you five per cent of the amount you borrow.
They say this is a cheaper than getting a short term loan, but we challenge that. If you were to access $500 through this service, you would pay a five per cent fee, equal to $25. This would be repaid in less than a month at most, however many days are left in your pay cycle. If you were to spend this same amount on a credit card with an interest rate of 20%, you would pay less than $9 if this amount sat on your card for less than a month.
This service has not made it easy to access information on what happens if you can’t repay the loan. My guess is if you can’t repay the loan, there are going to be additional expenses.
Looking at pay day loans more broadly, Moneysmart, the Australian Securities and Investment Commission’s (ASIC) website points out that “A payday loan, also called a small amount loan, lets you borrow up to $2,000. You have between 16 days and one year to pay it back.
“While it might look like a quick fix, a payday loan has a lot of fees. For example, to pay back a $2,000 payday loan over one year, your total repayments will be about $3,360. That’s $1,360 more than you borrowed.”
It says to look out for the following:
- Are there establishment fees?
- Are there late fees which kick in if you miss a payment or pay late?
- Are you charged monthly account-keeping fees?
- Are there payment processing fees?
Flexible, creative arrangements in credit and all their variations are rapidly growing. Now that Christmas is coming, with all its extra pressure to spend, I urge you to be very careful.
In a similar vein to this heavily marketed pay day loan, we’re now seeing more ads for ‘Buy Now Pay Later’, something also to be wary of at Christmas. These businesses include: Afterpay, BrightePay, Humm, Openpay, Payright and Zip Pay.
A typical ad for buy now pay later says “No interest. Ever.” It also says you can sign up in two minutes. Alarm bells should ring. If it’s that easy to get into, who in the back office is checking whether you have the financial profile to be able to afford it?
In November 2020, ASIC published a report on the buy now pay later industry that said: “the number of buy now pay later transactions increased from 16.8 million in the 2017-18 financial year to 32.0 million in the financial year 2018-19, representing an increase of 90%.”
It said one in five consumers are missing payments. It says missed payment revenue in 2018-19 in Australia came to $43 million. So that means a lot of people who’ve missed their regular payments have been charged a lot of extra fees.
In a typical case reported by the ABC, Rachel Black explained recently she needed $75 to buy dogfood. She ended up paying $101 with interest and fees.
Rachel said one of the insidious things about taking out this style of loan is that you get text messages offering you more. She never gets out of debt.
“Once you go to one of these lenders, all these other lenders start sending text messages asking, ‘do you want a top-up this week?” she told the ABC.
Are you someone who is in a debt trap and needs financial planning advice? Get in touch and we can help you put together a plan to work your way out of debt and into savings.