What Is a Payday Loan?

Sep 9, 2019
Reading Time: 3 minutes
Written by Alex Vella

Needing cash swiftly is a common occurrence, and many people simply do not have the funds on them if an emergency occurs. In this circumstance, payday loans can help you meet your financial obligations. Usually known as a small amount loan, cash loan, or even a quick loan, payday loans can offer a convenient way out of situations that require you to have cash on short notice.

What is a payday loan?

A payday loan is a high-cost short-term loan. It is a relatively small amount of money that is lent with an agreement that it be repaid when the borrower receives their next wages, hence the name ‘payday loan’. Typically, the loans include cash up to $2,000 that must be repaid between 16 days to 1 year.

How do you pay it back?

A typical repayment will usually be achieved by either direct debit from your bank account and or a deduction from your pay. Your loan repayments will typically be deducted on the day you are paid. This means you will need to make sure there is adequate money in your account to cover the payment.

What will the loan cost?

The government heavily regulates the fees and charges surrounding payday loans to ensure that these loans are made responsibly. While the exact fee charged will vary depending on the amount of money you borrow, credit providers will only be allowed to charge you with:

  • A one-off establishment fee of 20% of the amount loaned.
  • A monthly account keeping fee of 4% (maximum) of the amount loaned.
  • A government fee or charge.
  • Default fees or charges.
  • Enforcement expenses – provided you failed to pay back the loan. These are the costs of the credit provider going to court to recover the money you owe.

Ultimately, there will be an additional price to pay other than the acquired amount.

Who can get a payday loan?

Credit providers bound by law must lend money in a responsible manner. This means they must not lend you money if they think the credit would be unsuitable for you. For example, if you:

  • Have had 2 or more other small loans in the last 90 days;
  • Are spending all of your money each pay and are unable to meet other expenses;
  • Have defaulted (failed to pay) another quick loan

Then it would be less likely for a lender to give you a quick loan. While there is a degree of discretionary involved, credit providers must adhere to strict criterium concerning all lending loans.

Alternatives to a payday loan

While payday loans are useful and convenient, acquiring money may be cheaper through alternative methods. Such methods involve:

  • Negotiating with your utility provider: Most companies have hardship officers who can help you work out a plan to pay the bill in instalments or apply for emergency bill vouchers. See problems paying your bills for more information.
  • Get a no interest loan: If you’re on a low income, you may qualify for a no or low interest loan.
  • Centrelink advance payment: If eligible for Centrelink benefits, you may be able to get an advance payment on your benefits. See the department of human services for more information.


Ultimately, payday loans will be useful in times of desperation. However, in addition to payday loans you should approach the alternative section first before moving on. Should you require expert legal advice, it is wise to seek advice from a commercial lawyer.

Don’t know where to start? Contact us on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest lawyer marketplace.

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