These are unsecured short-term loans which are used in case of a cash emergency.
What Are Payday Loans - New Zealand?
These are small loans with the typical loan amount ranging from NZ$100 to NZ$1,000. The repayment term is usually from 1 to 4 weeks. Basically, you will have to repay the loan on your next payday. When you are granted the loan, you will sign a direct debt order so that the lender can automatically withdraw the principal amount plus interest and fees out of your account on your next payday.
You may be able to negotiate an extension of the loan in some cases, but the lender will continue to charge interest. You may have to pay additional fees as well. In this way, the cost of the loan will be even higher and more difficult to pay.
Most payday loans are extended without a credit check. Even if the lender looks into your credit record, they may not take the information into account when deciding whether to grant you the loan. This makes the payday loans easily accessible to people with bad credit and even to those with bankruptcy.
How Much Do They Cost?
The payday loans are quite expensive. In fact, they are more expensive than most other types of loans. One of the reasons for this is that the interest rate is charged on a daily basis. Fees are charged as well. Usually, you will have to pay a loan initiation fee plus a service fee. If you take out NZ$100, for example, you may have to pay back NZ$147. The amount which you have to pay back does not seem very high, but if you calculate the APR, it will come to several hundred percent. Besides, the repayment term is short and this can make the loan even more challenging to repay.
What to Look for?
The high cost of borrowing can get you into trouble so you have to be extra careful about the payday loans. It is fine to use such a loan in case of a cash emergency which occurs rarely. If you have to have a leaky pipe fixed in order to protect your home from water damage, for example, the use of such a quick cash loan is reasonable. You will have to go through the next month with a considerably lower income, but you can be prudent and manage the situation without borrowing more.
At the same time, you should not use these loans on a regular basis for managing your monthly budget. If you do not have sufficient income to cover your monthly expenses and borrow money, you will have even lower disposable income after repaying the loan the following month. This may push you into a cycle of borrowing which will get you into more serious debt trouble.
If you do not use payday loans carefully and get into debt, this can be harmful for your credit record. As a result, your application for a traditional loan may get denied. Your account may be sent to debt collectors and you may even get sued by the lender. These are the typical consequences of defaulting on any type of loan. The problem is that with payday loans, the risk of default is much higher. Extending the loan may also not be the right solution as it will keep getting more expensive and more challenging to pay back.
What Are Bank Payday Loans?
In the past, payday loans were offered predominantly by small local lenders, but now the large banks are moving into this market niche as well. Their payday loans are easier and faster to obtain in comparison to their traditional loans. The interest rates and fees charged are higher, however. You should not expect the personal loans offered by banks to differ considerably from those of specialised lenders when it comes to the cost of borrowing and the repayment schedule.
The banks also use direct debit orders to ensure the timely repayment of their payday loans. The difference is that they do it much more quickly than the smaller lenders. This gives you even less flexibility for negotiating an extension of the repayment term.
The nature of payday loans does not vary considerably from one lender to another. However, you will have the best chances of securing an affordable deal if you compare as many products as possible. The credit product which you choose must have clear terms and conditions and must come from a registered credit provider who is perfectly reliable.
What Are the Alternatives to Payday Loans?
These loans are quick solutions in case of a cash emergency, but they are not the only options available to you. Check out the other ones.
Step 1: Establish an emergency fund
You simply need to put aside some cash to use in case of an emergency. You should keep it in a bank account rather than in your home to avoid the temptation of tapping into it without good reason.
Step 2: Work towards improving your credit
This will enable you to get approved for a traditional personal loan with lower interest rate fairly quickly.
Step 3: Get a credit card to use for emergencies only
Ideally, this card should have low fee for cash withdrawal and affordable interest rate.
Step 4: Use a traditional unsecured loan instead of a payday loan
It pays off to compare different products for finding the most affordable one.
Step 5: Find a way to earn extra employment income
You can get a part-time job and work in the evenings or on weekends to make more money. This will enable you to cover your monthly expenses without having to borrow money frequently and risk getting into debt.
Step 6: Use debt management to repay your current loans
This involves negotiating more favourable repayment terms and conditions which will leave you with higher disposable income.
Step 7: Sign up for an overdraft program
As part of the program, the bank will make payments which exceed the amount of money in your account automatically. You will have to repay the withdrawn amount and plus the required charges.
Step 8: Try peer to peer lending
In this case, the loans are provided by private persons. They are very easy to obtain and may be less expensive than payday loans.
How Do You Apply?
The supporting documents which lenders require along with the filled out online loan application form are:
- Valid New Zealand ID card
- Pay slips for the past 3 months
- Bank account statements for the past 3 months
If you earn income as an employee, self-employed individual or contractor, you will have high chances of approval.
The payday loans can be useful in case of a financial emergency because they are very fast and easy to get. As long as they are affordable to you, you can use them when the need arises. However, they are not helpful for managing your monthly budget as they can get you into debt when used frequently.