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Managing your loan

A closer look at payday lenders during COVID-19

Kathryn Ogilvie, Content writer

31 Aug 2020 • 6 mins
girl thinking

With so many people facing financial difficulties from the impact of COVID-19, a recent report by the ABC voiced concerns over payday lenders actively targeting vulnerable people by offering short-term loans to get them through the coronavirus pandemic.

As of April this year the National Debt Helpline reported that more than 10,000 people had called for help during that month. Generally, most people were concerned with credit card debt, trouble paying personal loans, mortgage arrears and other household debt. 

This overview of payday loans takes a closer look at the fees and rates and includes questions to ask if you are considering this type of loan, so you can do your research and consider your options carefully.

What is a payday loan?

A payday loan - more formally known as a Small Amount Credit Contract (SACC) - is essentially a high-cost short-term loan. These loans are for amounts between $100-$2000 and need to be repaid within the period of 16 days to one year.

Since there’s no credit check involved, you can usually be approved for a payday loan quickly. But this easy-to-get money comes with a heavy price, usually in the form of exorbitant fees and up to triple-digit interest rates.

Why would I get a loan?  

Imagine this: the hot water unit has just blown up and you have no cash to buy a new one. You need to fix it quickly so you sign up for a payday loan. Sounds like a good solution, doesn’t it?

However, in signing up for a payday loan, you’re committing yourself to repay your lender a total amount greater than the amount you are borrowing from them.

Here’s an example: to borrow $500 to get the new hot water unit, it might cost you about $800 to repay your lender over a 12-month term. You might be certain you can repay the $800 over 12 months without problems but the big question is whether the payday loan is worth it.

How is a payday loan different from a credit card?

  • Credit cards allow you to borrow money — your line of credit — from a lender in order to make purchases. Unless you pay off your monthly balance in full each month, interest will accrue on the amount of debt that you carry forward.
  • There is no credit check for payday loans - making it quick and easy to get access to funds
  • According to a recent article on the ABC news website, short-term lenders in Australia are structuring their businesses to avoid regulation under national credit law – consumer protections like affordability checks, financial hardship assistance and proper dispute resolution processes.
  • Payday lenders actively promote themselves to you once they have your details in their system - even when you’ve paid back the loan. This constant temptation sent to you via email and SMS can be hard to resist if you are facing a tight time financially – or just really want some new clothes or furniture.
  • Both are still debt and can be a strike on your credit rating if you don’t pay it back in time.  

    What to consider

    If you're convinced that a payday loan is for you then here are some things to know before you sign on the dotted line.

    • How well do I understand the product?
    • Do I understand the total amount I need to repay or just the amount I am seeking to borrow?
    • How detailed and realistic is the plan I have for repaying the loan?
    • Am I borrowing for responsible reasons?
    • Is it essential to borrow now or could my timing be better?
    • Have I considered alternatives to payday loans?
    • What impact would this debt have on my borrowing capacity for other loans, like a home loan?

    How does the payday loan process work?

    To get approved for a payday loan, you need to provide documentation including bank statements, ID, copies of bills or Centrelink receipts, employment information and income details.

    Be sure to check the fees for the different providers. Some of the key ones include the establishment fee, monthly fee, late payment fee and default fee. The maximum establishment fee a lender can charge is 20% of the borrowed amount. If you borrow $500, for example, you may need to repay that plus an additional $100 (20% of the borrowed amount).

    A lender can also charge a monthly fee of up to 4% of the original amount borrowed. If you elect to repay your $500 loan over 12 months, this amounts to $20 per month for 12 months ($240). These fees alone mean you’ll be repaying the lender $840 for the $500 you borrowed.

    Factor in late payment fees, which are commonly set at $15 per missed payment, and you can see that it’s easy to find yourself with a debt that is almost double what you borrowed. Default fees are significant too. A lender can charge you up to twice the total amount of the loan in default fees before they’re capped, inclusive of any repayment fees you made under the contract.

    You may wish to use a loan calculator before you apply for a payday loan to work out all the incremental costs payable on the loan.

    Moneysmart's payday loan calculator

    Do your research to protect yourself

    The better informed you are about payday loans, the better you can protect yourself from potential drawbacks and the more confident your decision making will be. If you make a decision to apply for a payday loan, your due diligence should always involve performing a prior background check of potential lenders and ensuring that you satisfy eligibility requirements for the loan. Conducting your due diligence will go some way to helping you take care of your money and protect your credit report.

    Still a debt

    Although the amount borrowed may be small, a payday loan still counts as a debt. When applying for other credit, for example, if you were applying for a home loan, this debt would be taken into account in your application.  You might find it useful to visit MoneySmart’s website for further information on Payday Lenders .

    COVID-19 and payday loans

    Many people are experiencing financial stress with the impacts of the global pandemic COVID-19.  An easy or quick fix may be to borrow more money to pay off existing debts. 

    If you already in financial hardship getting another credit card or taking on a payday loan could worsen the situation by taking out a high-cost, short-term loan.

    Reach out for support

    Here are some ideas to help manage financial stress during COVID-19.

    • List out your full budget including food, bills, utilities, recreation, eating out etc. See if there is anything you can do without – $10 a month for Netflix may seem a small amount but it all adds up.
    • List out all current debts and see what can be paid off immediately.
    • See resources on the Moneysmart website including a list of financial counsellors who can offer free and independent advice with debt to come up with a long term suitable solution to avoid these kinds of debt spirals.
    • Contact all your utilities, insurance companies and home loan lender if you're having trouble paying bills or making repayments. Most organisations are offered assistance to help you through this.
    • MoneySmart website offers contact details and links to the National Debt Helpline.
    • If you an existing Keystart customer we've teamed up with Relationships Australia WA to offer support to their customers facing difficulties.

    Keystart resources

    There is also more information on our website about getting support if you're experiencing financial difficulties due to the impacts of COVID-19.


    Keystart recommends that you seek your own independent financial advice prior to making any decisions about your financial needs. Any examples given in this post are provided for illustrative purposes only.