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What Are Payday Loans? | Canstar

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They are called payday loans, small amount loans, cash loans, small loans, short-term loans and more, but the allure of getting cash quickly this way can conceal significant hidden fees and costs that leave a lasting sting on your hip pocket.




Sometimes a crisis comes up in life, and you need money quickly. Or sometimes, despite your best efforts, you may fall behind paying living expenses like rent, electricity and food. If you don’t have an emergency fund or regular savings, you might consider asking a friend or family for help or borrowing some money from a credit provider.




Payday lenders often offer loans of up to $2,000 – promising fast, convenient and easy access to cash. But are they a smart choice for Australians financially?












What is a payday loan?




A payday loan is a loan of up to $2,000 that you have between 16 days and one year to pay back, according to the Australian Securities and Investments Commission (ASIC)’s Moneysmart website. Payday loans are also known as small amount credit contracts, or SACCs.




Lenders cannot legally charge interest on payday loans. However, there are often very high overall fees attached that aren’t always obvious upfront for borrowers. These fees are capped but can still be very high compared to most other forms of credit. They can include an establishment fee (up to a maximum of 20% of the amount borrowed), a monthly service fee (up to 4% of the amount borrowed, every month) default fees and enforcement expenses. Moneysmart warns that if you take out one of these loans, you’ll end up needing to pay back “a lot more than you borrowed”.




What are the pros and cons of payday loans?




Although getting a payday loan might seem convenient, the Financial Rights Legal Centre explicitly says “using a payday lender is not recommended”. Here are three cons of payday loans:




1. Overall cost




Payday loans bring high fees – such as an establishment fee (up to a maximum of 20% of the amount borrowed), a monthly service fee (up to 4% of the amount borrowed, every month) default fees and enforcement expenses.




Dr Vivien Chen
Dr Vivien Chen.








“Digital platforms make payday loans very accessible, almost too accessible – but often, borrowers do not fully understand the costs, risks and consequences of these loans,” she told Canstar.




2. Risk of unmanageable debt




If you borrow money and need to repay it with high fees, charges and penalties payable, you will be more likely to get into unmanageable debt than if you accessed the money in a cheaper way. This can become a serious financial problem in the longer term.




3. Potential damage to your credit score




If you repeatedly shop around for credit and apply to multiple credit providers in a short timeframe, or miss any loan repayments, your credit score might drop, and this could stay on your credit history for some time. Having a low or bad credit rating can affect your borrowing capacity in the future. For example, it might affect whether you are approved for a car loan or a home loan, plus the interest rate a lender charges you.








Who uses payday loans?




Research by a national coalition of consumer advocacy groups, Stop the Debt Trap, shows over 4.7 million individual payday loans were issued for around 1.77 million Australian households between April 2016 and July 2019, generating about $550 million in net profit for lenders. Many Australians who are experiencing financial stress turn to payday loans, with earlier research showing payday loans are increasingly available on digital platforms. Often, vulnerable women, commonly with sole responsibility for children, are relying on payday loans as emergency cash for household expenses. These women are unfortunately also taking out multiple loans in many cases, according to Good Shepherd Microfinance.




Why are payday loans a poor credit choice?




If you are already in a difficult financial situation, payday loans can make it worse. Stop the Debt Trap’s research suggests around 15% of payday loan borrowers fall into a “debt spiral” within five years. Over this time, Stop the Debt Trap estimates, about an extra 324,000 Australians may progress towards a debt path that might lead to an event like bankruptcy.








What regulation applies to payday loans in Australia?




Under Australia’s credit legislation, including its responsible lending regulations, banks, credit unions, brokers and other lenders are regulated and licensed in Australia, and aren’t allowed to give credit to borrowers who can’t pay it back.




Additional responsible lending laws apply to small amount credit contracts (SACCs) under the National Consumer Credit Protection Act at the time of writing, including the fee caps discussed earlier. Recently, stakeholders including consumer groups have shared their views about proposed credit reforms as part of a Senate inquiry, with concerns there may be weaker protections for consumers in future from predatory lending.




What are some alternatives to payday loans?




Australians should seek free, professional help from a financial counsellor instead of taking on debt from a payday loan or an alternative like a personal agreement.




“Consumers who are experiencing difficulties making payments for utilities, telecommunications or loans can contact their service provider for hardship arrangements such as an extension of time for payment,” said Dr Chen.




“Additional help such as utilities relief grants or household relief loans may be available and people who are experiencing family violence and are facing financial difficulties can seek hardship assistance from their credit or utility provider.”




Dr Chen said that if consumers have trouble reaching suitable hardship arrangements with a credit or utilities provider, they could consider contacting a financial counsellor to assist with negotiations, as this might lead to better outcomes.








The NDH are both free and impartial. A financial counsellor can help if you need to “negotiate a settlement of debts” with existing credit providers, plus join calls with you as an advocate if you need support handling difficult money conversations with credit providers.




Separate to addressing how you manage debt, ASIC’s Moneysmart suggests the No Interest Loans Scheme (NILS) or a Centrelink advance payment may be suitable, cheaper options if you are eligible and need to get money fast.




What support is available if you are in financial stress?








Payday loans: frequently asked questions




What is a bad credit payday loan?




A payday loan, or small amount credit contract, or SACC, might be marketed to you as a ‘bad credit payday loan’. This means a lender is targeting the loan towards people who have a bad credit score, as they may be less likely to get approval for credit. Keep in mind that if you have a low credit score, you are likely already financially vulnerable – you could have fewer borrowing options than someone with a higher score. Making repeated requests for credit can negatively impact your credit score. If you are alternatively considering a bad credit personal loan, we’ve covered what to look out for.




Should you take out a payday loan?




The Australian Securities and Investments Commission (ASIC) says on its Moneysmart website that when it comes to payday loans, “there are cheaper ways to borrow money when you need it”, adding, “If you’re struggling to pay your bills, don’t get a payday loan.” To protect your credit score and finances, you might like to consider other options aside from a payday loan if you need to borrow money, such as a NILS loan or a Centrelink advance.




How much does a payday loan cost?




You can use the Moneysmart Payday loan calculator to help work out the true cost of a payday loan, modelling the costs based on the loan details such as the amount (up to $2,000) and borrowing term (from 16 days up to one year).




What is the interest on a payday loan?




No interest is allowed to be charged on a payday loan. However, there are often very high overall fees attached that aren’t always obvious upfront for borrowers. These can include an establishment fee (up to a maximum of 20% of the amount borrowed), a monthly service fee (up to a maximum of 4% of the amount borrowed, every month), default fees and enforcement expenses.




Are payday loans dangerous?




Research by Stop the Debt Trap suggests payday loans can be “devastating for the people involved” because “these products are aggressively marketed, which can drive people away from other services that may be more suitable, such as free financial counselling or no or low interest loan schemes”. The National Debt Helpline says the risks of payday loans include very high costs, needing to borrow again to repay the loan, a potential negative impact on your credit rating, high default fees, and being difficult to get out of. Plus, it adds, payday lenders usually sign customers up to pay by direct debit on payday. This can mean money is taken out of your income before essential expenses such as food and rent. If you find yourself unable to make ends meet, you could find yourself in a debt trap that brings more serious long-term consequences.




How do you take out a payday loan?




Consumers can take out a payday loan online or by contacting a credit provider that’s offering high-cost, short-term loans directly over the phone or in person. Lenders will usually require applicants to share information that relates to their income, identity and the loan purpose. If you have a severe history of default or a bad credit rating, you might get turned down for a payday loan, and making multiple requests for credit can have a negative impact on your credit rating.




Can anyone get a payday loan?




Payday lenders tend to be more flexible in their borrowing requirements than major banks. So, if you’re self-employed or have a poor credit rating, you might pass some payday lenders’ borrowing standards. However, you’ll still need to show you have capacity to repay the loan, and this will be assessed based on factors such as your income, spending, identity, employment and credit score. If you are under 18, are not an Australian citizen or resident, have unstable or insecure employment, have a history of poor spending habits, have a low income or have a bad credit score, you might be declined access to a payday loan. Speaking to a financial counsellor for advice on getting your debt under control could be helpful, ideally before you consider applying for a payday loan. Free, confidential advice is available from the National Debt Helpline on 1800 007 007.




Main image: Rawpixel.com/Shutterstock.com





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Are Sallie Mae Student Loans Federal or Private?

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When you hear the name Sallie Mae, you probably think of student loans. There’s a good reason for that; Sallie Mae has a long history, during which time it has provided both federal and private student loans.

However, as of 2014, all of Sallie Mae’s student loans are private, and its federal loans have been sold to another servicer. Here’s what to know if you have a Sallie Mae loan or are considering taking one out.

What is Sallie Mae?

Sallie Mae is a company that currently offers private student loans. But it has taken a few forms over the years.

In 1972, Congress first created the Student Loan Marketing Association (SLMA) as a private, for-profit corporation. Congress gave SLMA, commonly called “Sallie Mae,” the status of a government-sponsored enterprise (GSE) to support the company in its mission to provide stability and liquidity to the student loan market as a warehouse for student loans.

However, in 2004, the structure and purpose of the company began to change. SLMA dissolved in late December of that year, and the SLM Corporation, or “Sallie Mae,” was formed in its place as a fully private-sector company without GSE status.

In 2014, the company underwent another big adjustment when Sallie Mae split to form Navient and Sallie Mae. Navient is a federal student loan servicer that manages existing student loan accounts. Meanwhile, Sallie Mae continues to offer private student loans and other financial products to consumers. If you took out a student loan with Sallie Mae prior to 2014, there’s a chance that it was a federal student loan under the now-defunct Federal Family Education Loan Program (FFELP).

At present, Sallie Mae owns 1.4 percent of student loans in the United States. In addition to private student loans, the bank also offers credit cards, personal loans and savings accounts to its customers, many of whom are college students.

What is the difference between private and federal student loans?

When you’re seeking financing to pay for college, you’ll have a big choice to make: federal versus private student loans. Both types of loans offer some benefits and drawbacks.

Federal student loans are educational loans that come from the U.S. government. Under the William D. Ford Federal Direct Loan Program, there are four types of federal student loans available to qualified borrowers.

With federal student loans, you typically do not need a co-signer or even a credit check. The loans also come with numerous benefits, such as the ability to adjust your repayment plan based on your income. You may also be able to pause payments with a forbearance or deferment and perhaps even qualify for some level of student loan forgiveness.

On the negative side, most federal student loans feature borrowing limits, so you might need to find supplemental funding or scholarships if your educational costs exceed federal loan maximums.

Private student loans are educational loans you can access from private lenders, such as banks, credit unions and online lenders. On the plus side, private student loans often feature higher loan amounts than you can access through federal funding. And if you or your co-signer has excellent credit, you may be able to secure a competitive interest rate as well.

As for drawbacks, private student loans don’t offer the valuable benefits that federal student borrowers can enjoy. You may also face higher interest rates or have a harder time qualifying for financing if you have bad credit.

Are Sallie Mae loans better than federal student loans?

In general, federal loans are the best first choice for student borrowers. Federal student loans offer numerous benefits that private loans do not. You’ll generally want to complete the Free Application for Federal Student Aid (FAFSA) and review federal funding options before applying for any type of private student loan — Sallie Mae loans included.

However, private student loans, like those offered by Sallie Mae, do have their place. In some cases, federal student aid, grants, scholarships, work-study programs and savings might not be enough to cover educational expenses. In these situations, private student loans may provide you with another way to pay for college.

If you do need to take out private student loans, Sallie Mae is a lender worth considering. It offers loans for a variety of needs, including undergrad, MBA school, medical school, dental school and law school. Its loans also feature 100 percent coverage, so you can find funding for all of your certified school expenses.

With that said, it’s always best to compare a few lenders before committing. All lenders evaluate income and credit score differently, so it’s possible that another lender could give you lower interest rates or more favorable terms.

The bottom line

Sallie Mae may be a good choice if you’re in the market for private student loans and other financial products. Just be sure to do your research upfront, as you should before you take out any form of financing. Comparing multiple offers always gives you the best chance of saving money.

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Tips to do some fall cleaning on your finances

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Wealth manager, Harry Abrahamsen, has five simple ways to stay on top of the big financial picture.

PORTLAND, Maine — Keeping track of our financial stability is something we can all do, whether we have IRAs or 401ks or just a checking account. Harry J. Abrahamsen is the Founder of Abrahamsen Financial Group. He works with clients to create and grow their own wealth. Abrahamsen shares five financial tips, starting with knowing what you have. 

1. Analyze Your Finances Quarterly or Biannually

You want to make sure that your long-term strategy is congruent with your short-term strategy. If the short-term is not working out, you may need to adjust what you are doing to make sure your outcome produces the desired results you are looking to accomplish. It is just like setting sail on a voyage across the Atlantic Ocean. You know where you want to go and plot your course, but there are many factors that need to be considered to actually get you across and across safely. Your finances behave the exact same way. Check your current situation and make sure you are taking into consideration all of the various wealth-eroding factors that can take you completely off course.

With interest rates very low, now might be a good time to consider refinancing student loans or mortgages, or consolidating credit card debt. However, do so only if you need to or if you can create a positive cash flow. To ensure that you are saving the most by doing so, you must look at current payments, excluding taxes and insurance costs. This way you can do an apples-to-apples comparison.

The most important things to look for when reviewing your credit report is accuracy. Make sure the reporting agencies are reporting things actuary. If it doesn’t appear to be reporting correct and accurate information, you should consult with a reputable credit repair company to help you fix the incorrect information.

4. Savings and Retirement Accounts

The most important thing to consider when reviewing your savings and retirement accounts is to make sure the strategies match your short-term and long-term investment objectives. All too often people end up making decisions one at a time, at different times in their lives, with different people, under different circumstances. Having a sound strategy in place will allow you to view your finances with a macro-economic lens vs a micro-economic view. Stay the course and adjust accordingly from a risk and tax standpoint.

RELATED: Financial lessons learned through the pandemic

A great tip for lowering utility bills or car insurance premiums: Simply ask! There may be things you are not aware of that could save you hundreds of dollars every month. You just need to call all of the companies that you do business with to find out about cost-cutting strategies. 

RELATED: Overcome your fear of finances

To learn more about Abrahamsen Financial, click here

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How to Get a Loan Even with Bad Credit

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Sana pwedeng mabura ang bad credit history as quickly and easily as paying off your utility bills, ‘no? Unfortunately, it takes time. And bago mo pa maayos ang bad credit mo, more often than not, kailangan mo na namang mag-avail ng panibagong loan. 

Good thing you can still get a loan even with bad credit, kahit na medyo limited ang options. How do you get a loan if you have bad credit? Alamin sa short guide na ito. 

For more finance tips, visit Moneymax.

 

 

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