Risks of payday (short term) loans

Payday – or small amount – loans may seem very tempting if you need cash quickly to pay bills or debts. But how much is that ‘quick fix’ really costing you?

The reality is, they’re expensive (you’ll end up paying back a lot more than you borrowed).

Payday lenders often use attractive advertising to convince you they have the perfect solution to your worries. But that’s not the case. Here’s why:

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Risks of payday loans


Very high costs

These types of loans have very high fees (20% of the amount borrowed + 4% per month), which translate into very high annual interest rates. Payday lenders are not legally required to tell you the annualised interest rate.

And then there are all the fees and charges that are only explained in the small print! For example, some payday lenders will charge you $7 per day for late payment.

Payday loans are far more expensive than personal loans from mainstream banks (which usually have an annual interest rate between 8 and 15%).


  • See exactly how much a payday loan will cost you with MoneySmart’s Payday Loan Calculator
  • If you’re eligible for Centrelink benefits, you may be able to get an interest-free advance payment on your benefits.


Repayments made by direct debit

Payday lenders sign you up to pay by direct debit on pay day, meaning they take your money from your income before you pay for food or rent. If you can’t afford the repayments for your payday loan, cancel the direct debit and organise a repayment plan with your lender that you can afford.

How to stop a direct debit


You borrow again to repay the loan

When you can’t repay the loan, the temptation is to borrow again to repay the last loan. It’s a debt trap!


It may affect your credit rating

If you can’t repay the loan due to the high costs, it may affect your credit rating.
More about credit ratings


If you’ve already tried to get a loan from the bank and been rejected, it’s probably because they think the repayments will put you at risk of financial hardship. (Under the National Consumer Credit Protection Act, all lenders must ensure that you can afford to repay the loan without substantial hardship.)

If a bank has done this, consider whether you can really afford to repay more credit.

Alternatively, it may be that you have a bad credit rating. Learn more about bad credit ratings.


Difficult to get out of

In our experience, many people who access payday (fast) loans are in financial hardship. When you can’t make repayments, it is very difficult to get out of the situation.


High default fees

If you default (you fail to pay back the loan on the due date) you’ll usually be charged default fees that are added to your debt. The amount that can be charged in default fees is up to twice the amount you borrowed. You are severely penalised for missed payments.

Better ways to get your debt under control

Is your phone bill out of control?

If you can’t pay your phone bill, call your service provider. You may be surprised at the help they can give you!

More about paying phone and internet bills

Need to pay an outstanding utility bill?

If you’re having trouble paying an electricity, gas or water bill, call your utility provider as soon as you can.

More about paying utility bills

Need to buy essential household goods?

‘No Interest Loan Schemes’ (usually $800 to $1,500) are available for people on low incomes to buy essential household goods, such as washing machines and fridges.

More about No Interest Loan Schemes (NILS)

Need help urgently with everyday living expenses?

If you’re in crisis or need help urgently with living expenses, there are emergency relief programs to help you with things like food, transport, accommodation, utility bills and clothing.

More about emergency assistance



There are rules in place to prevent unfair contracts from payday lenders.

Unsuitable loans
It is an offence for a lender to provide you with an unsuitable loan.
A loan may be unsuitable if:

  • It doesn’t meet your requirements and objectives and/or if you couldn’t repay the loan without experiencing substantial hardship
  • More than 50% of your income is from Centrelink and the repayments for the payday loan are more than 20% of your income
  • You already had more than 2 other payday loans in the 90 days before you got the current payday loan
  • At the time of the new loan, you were already in default with an existing loan
  • In these cases, if the loan is unsuitable, it’s possible that you may not have to pay back the fees/charges on the loan

If you feel you’ve been provided with an unsuitable loan, call us on 1800 007 007.

No secured payday loans
Lenders are not allowed to take security for the loan. This means that payday loans can’t be secured by your goods or property.