Payday loans are a brilliant way to bridge the gap between paydays. With loan amounts up to $2,000 that you'll only need to pay back after 16 days, this is the perfect quick credit solution.

The biggest selling point of a payday loan is that it's possible to have the money in your account in a matter of hours, or at the latest, 2 days after your loan is approved.

The downside to any short term loan is that the fees are higher than those charged on personal loans. As with all loans, if not managed properly a payday loan can turn toxic and destroy your credit record for years to come. Here are 8 tips to avoid that!

#1) Compare payday lenders based on their service

Customer reviews are a good place to start when researching lenders. By using sites like Trust Pilot, Product Reviews, and Finder you can see how lenders have been rated by their customers. You'll be able to view the comments and see if the lender responded to customer queries.

It's best to go with companies that take an interest in what their customers have to say, particularly if it's in the form of a complaint. You will be dealing with this lender for the rest of your loan term and need to be sure that they will discuss any issues that come up.

#2) Compare loan costs to find the most affordable

The fees attached to payday loans can be a little heavy, but if you know what to look for you can still find a good deal. These are two types of lenders who's fees are structured very differently.

ADI

These are authorised deposit-taking institutions such as banks, credit unions and building societies. their fees are regulated but they may also charge you interest on all loan amounts.

Alternative lenders

These lenders can't charge you interest on loan amounts under $2,000. Their other fees are capped and regulated. The highest fee percentages they may charge you are:

  • 20 % of the loan amount as a once-off establishment fee
  • 4% of the loan amount as a monthly account maintenance

When comparing the costs of different loans be sure to pay attention to the APR. The annual percentage rate is calculated by adding all fees attached to the loan. This will be the most accurate representation of what you will pay as monthly instalments.

#3) Choose a longer loan term to make your payday loan more affordable

In theory, you should pay back your payday loan as soon as your next paycheque clears. The payment is structured so that the full loan amount, as well as any attached fees, are deducted in a single payment. However, in an attempt to make payday loans more flexible, lenders now offer you a longer payment term. Now you can take up to 12 months to pay off your payday loan.

By opting for a longer period of time in which to repay your loan, the monthly instalment you pay becomes a smaller sum. This is not pure altruism on the part of the lender, as they gain on the monthly account maintenance fees. Taking a longer payment term and paying off your loan diligently will also reflect well on your credit report.

#4) Always take out only what you need

All fees on a payday loan are percentages of the loan amount. The more you borrow the higher your fees will be. For instance. this is what your payments would look like on $1,000 if you chose a 4-month term.

  • 20% establishment fee $200 divided by 4 months= $50pm
  • 4% monthly account maintenance= $40pm
  • Monthly instalment $250
  • Total due per month = $340pm

This is if you take a payday loan from a lender who can't charge you interest. Payday loans are meant as a quick short-term fix for the little financial hiccups. By keeping the borrowed amount low you can make sure it's just a temporary situation.

#5) Never take out a loan if you know your financial circumstances will change

Taking on debt isn't a decision that should be made lightly. Even payday loans can have long-lasting consequences. If your financial situation is unstable, now is not the time to take out even a small loan. The penalties you face for defaulting on loan payments aren't worth the risk.

By law, lenders must look into your financial situation before they can extend a loan. They are required to lend responsibly and not extend a loan to you that you won't be able to afford. Whether you are changing jobs, entering into a new rental contract or changing service providers it's best to wait until your finances settle before entering into a loan agreement.

#6) Opt to repay your loan via debit order

Debit orders are a good way to make sure you never forget or miss a payment. It's easy to set up, and all you have to do is make sure the money is in your account on the date the debit order is set to go off.

If you can choose the date the order goes off your account, make it the day after you get paid. This way your debit order will not go off before funds are in your account. It’ll also be easier to not spend the money accidentally. Make sure your debit order does not bounce, or you’ll end up paying bank charges on top of late fees!

#7) Always pay on time

A big part of managing your payday loans is making sure your payments are on time and never missed. These are the penalties you can look forward to if you default on your payments.

Default fee of no more than 200%. This means the lender can charge you double the loan amount if you miss payments or can't pay off the loan.
Enforcement fees, this means you will be liable for the court costs if the lender has to take matters that far.

Late payments will be reflected on your credit record for up to 5 years. Defaults can stay with you for up to 7 years. This can negatively impact your future as it affects your ability to secure a rental agreement, car loans and even some kinds of employment. Provisions can be made in the case of emergencies and may be indicated in the loan agreement.

#8) If you can't make your payment, contact your lender

Life is unpredictable and there may be times when you won't have any good options. It's best to contact your lender the moment you realise you won't be able to make your payment. Give them as much warning as you can so that they can help you.

Lenders work with cases like this all the time and will understand if you explain your situation to them. Many Australian lenders will offer to renegotiate the loan terms to help you. They will usually extend the loan period to decrease the instalment for you.

By reaching out to your lender you can avoid being charged penalties and it won't reflect badly on your credit report. Pay attention to the section of your loan agreement that covers this eventuality. By managing your payday loan well you can make sure you build a healthy credit report going forward.