Payday lending pitfalls
Everyone needs a little help sometimes. An unexpected medical expense, the car needing repairs to pass its WOF, or new school shoes can all require cash in a hurry.
It is hard to make ends meet at the best of times, so when money is needed fast it can be easy to make a mistake with who you borrow from.
Not all lenders are the same
When you hear an advertisement on the radio or see one online offering for quick money it is very tempting. They seem to know your situation and they can help you with getting by until your next pay day. All loan providers are the same, right? Wrong. There are big differences between them, and unfortunately, trusting the wrong one is a very expensive mistake to make.
The way loans work
You know that all money lenders charge you for borrowing; it’s a very simple thing to understand. What is much harder to understand though is how much some lenders charge you. Not every lender is transparent with how much your small loan will end up costing you if you don’t pay it back quickly.
It might seem really straightforward; you borrow a small sum, then pay it back when you get paid. But it can often be really hard to stretch your pay across all the normal things you need to pay for, like the rent and the monthly bills, and pay off the amount you borrowed.
If you are able to pay off the loan on pay day, then great. If you can’t, this is where that small loan turns into something much bigger. Every single day that you don’t pay it gets larger and larger. What was originally a small loan turns into an amount you can’t pay back. It is very stressful having a debt mount up day after day.
If you have to continually push back the day you plan to pay it off, the worse it gets. You borrow again to pay off the first loan and you end up in a cycle of more and more debt. What could have been a small loan of $500 ends up as thousands.
In NZ, unlike the UK and US, there are no laws regulating how much a payday lender can charge you. Not only interest rates that are high, but direct debit fees, late payment penalties, and large establishment fees are the norm. Interest charged on a daily basis and left unpaid can end up as annual interest rates of over 1500%!
How to choose the right lender
The best advice is to use a company that works through your budget with you to make sure you are able to pay your loan back. They should look at the money coming in versus the money you have to spend each month on regular bills and living expenses. This is called ‘Responsible Lending’.
No one should ever lend you money if they don’t think you are capable of paying back without getting into a cycle of debt. Like Instant Finance, there are reputable companies in New Zealand who will lend to you when you need it, but who don’t trap you into a loan you can’t afford.
One high profile payday lender is at the centre of the commerce commission’s decision to take legal action against them.
The commission alleges the payday lender in question has breached responsible lending practices under the Credit Contracts and Consumer Finance Act (CCCFA) 2003. At the point of time in question, this company was lending between 185.5% and 547.5% interest! BEWARE!