What you need to know about cash loans
You’ve probably seen the ads on TV for companies offering small, short term loans which promise to get the money to you very fast. They’re usually very charming and enticing – especially when they tell you that you could have the money in your account “today!” – but what is really on offer? And is it ever a good idea to use them?
What are cash loans?
Cash loans, also known as payday loans, are a finance product that gives customers relatively small amounts of money to be paid back in a few weeks or a few months.
They’re technically classified as Small Amount Credit Contracts (SACC), and lenders must be licensed to provide them. The industry is strictly regulated by the Australian Securities and Investment Commission (ASIC) which dictates the fees that can be charged as well as loan terms and other details.
While the exact fee you are charged will vary depending on the amount of money you borrow, ASIC says credit providers are only allowed to charge you the following:
- A one-off establishment fee of 20 per cent (maximum) of the amount loaned
- A monthly account keeping fee of 4 per cent (maximum) of the amount loaned
- A government fee or charge
- Default fees or charges
- Enforcement expenses (if you fail to pay back the loan, these are the costs of the credit provider going to court to recover the money you owe them)
ASIC also says that lenders are not allowed to charge direct debit fees on any payday loans entered into from 1 February 2017. You can see more information on the ASIC MoneySmart website.
Is it ever ok to get a cash loan?
The answer to that question depends on your circumstances. The fees associated with cash loans make them an expensive way of getting a loan. Other options such as credit cards, pre-approved overdraft facilities, and personal loans are all cheaper ways of using credit to make a purchase.
The only advantage of cash loans over these other avenues is that they are typically much faster than the other options if you do not already have access to them. For example, a credit card application can take up to 10 business days whereas a cash loan can take just a few hours to process the application and transfer the funds.
Ideally, people who know what their options are can choose to get a cash loan because of the convenience of getting a loan quickly. In circumstances like these, cash loans can be used for emergency situations where someone has to deal with a large and expected cost, such as car repairs or a vet bill.
Problems can arise when people with no other options turn to cash loans out of desperation rather than for convenience. Responsible lending policies should prevent lenders from approving loans that are unsuitable for the customer, and ASIC has forced lenders to repay customers in the past when they have been in breach of their responsible lending obligations.
When a cash loan comes in handy – and when you should avoid them
If you understand your financial position, what all of your options are, and the costs associated with one, then cash loans are simply one of your options (and probably not your first choice).
Not everyone has plenty of savings lying around or ready access to credit. So, if you need to deal with a large expense urgently and it’s something that’s outside of your regular budget, then a cash loan from a regulated lender can be an appropriate way of paying for the expense.
However, you should not use a cash loan for recurring costs such as rent and bills. That could put you in a vicious cycle because you will still need to pay the same costs next month as well as repaying the cash loan.
Cash loans are a regulated part of the finance industry. They may not be your choice of credit, and they probably shouldn’t be, but they are an option, and they can be used responsibly in some circumstances.