No matter how small an amount you borrow or how short the term is, a payday loan is a financial commitment. So, before you click that “apply” button, you need to make sure you can afford the loan. There is no easy answer to this question, and often, you’re the only person who knows if you can manage it. How good are you at managing a budget? What are your other financial commitments? Are you taking on a more substantial amount than you need? These are some of the things you need to consider. So, how do you repay a payday loan?
Organising a budget
It seems like an easy suggestion, but people often overlook arranging a budget when it comes to short-term loans. Neglecting this step might be due to the nature of payday loans, as people usually apply for one when they need quick access to finance. Often, they apply to make sure they can get the money, rather than working out if they can afford it first.
The initial thing you need to do is look at the repayment terms and fees on offer from the lender. Then, you can work out how much your repayments are depending on how much money you’re looking to borrow, which is where a payday loan calculator is useful. You need to make sure you take into account the establishment cost, the monthly administration fee and the interest the loan attracts.
What is affordable when it comes to a loan?
Again, there is no easy answer, as there is no definitive percentage that can be given, eg if 20% of your wages is left after you pay your bills and made your repayment, is that it is enough to live off? People’s living expenses differ, and so this is where a budget may come in handy.
First, write down all your bill payments for the next month, which could include rent or mortgage repayments; utility bills you have due; your phone bill; car repayments or insurance premiums. How much of each pay packet do you use towards bills?
Then, work out your living expenses, which isn’t an easy thing to determine, but it can help to think day-to-day. Consider how much you need for groceries each week; petrol for your car; a few dollars for your morning coffee, etc.
After setting out your bills and your living expenses, add your determined loan repayment amount onto this. Do you have enough to cover everything? This calculation is the way to work out if you can afford the repayments.
Zoe's payday loan
For Zoe, finding a lender and applying for a loan was more straightforward than she thought. After comparing her options, she finds a lender that looks good, as they will let her repay her loan early without penalty, and most importantly, she meets the eligibility requirements. The trouble came when it was time to make repayments.
The lender set out Zoe’s repayment dates in her loan contract and will direct debit her repayment amount on the next two paydays. Zoe receives her pay weekly, which means she won’t have to worry about remembering to make the payments. However, when the loan repayments come out of her account, Zoe starts to struggle to fund her living expenses.
Being paid fortnightly means Zoe doesn’t usually have long to wait for her next payday, but now a huge chunk is taken out to meet her loan repayments. So, even though Zoe gets the loan and meets her repayments, not budgeting correctly before her pay dates means she has a tough month to get through as she repays her loan. Zoe decides if she needs to take out a loan out again, she will be more organised and make a budget.
What made Zoe’s loan unmanageable?
Please be aware that the interest rates of payday loans can make them expensive to repay. Zoe is paid $1,000 a fortnight but needs a loan of $350. Being paid fortnightly, this meant on each pay date $253.22 is directly debited from her account to repay her total loan amount of $506.44 (including fees and interest). Zoe is left with under half of her usual pay to manage her day-to-day expenses, which is a significant reduction in what she usually has to spend, so she found it difficult to manage without a plan.
Managing your loan on any income
Whether you earn $30,000 or $130,000, there’s a way to manage your budget and repayments for a loan on your income. Usually, people on lower incomes seek payday loans, but some scenarios may see a high-income earner take out a payday loan. Bear the following in mind when it comes to managing your loan on a lower income:
- Make the repayments on time. If you don’t do this, you will see late repayment, direct debit dishonour and even default fees added onto the amount you owe, which can send you further into debt.
- Contact your lender if you’re having trouble making repayments. Doing so can help you avoid the fees mentioned above, that the lender charges for you paying later. Loan providers are usually willing to help and can sort out a payment plan with you if you run into trouble, so they should be your first point of call.
- Only apply for a loan amount you can afford. Before you submit your desired loan amount, try and work out what the minimum amount is you can get by on. Consider the fees you need to pay and how even a slightly higher loan amount increases your repayments.
- Don’t take out several payday loans at once. If you already have a payday loan and have yet to repay it completely, do not apply for another one, as this can make your repayments unmanageable and send you into a debt spiral that you might find difficult to escape.
Payday loans can be a convenient form of finance to apply for, but you need to ensure the repayments are manageable before you apply. By working out a budget, organising your finances and only applying for an amount you actually need, you’re on the way to managing your loan and comfortably repaying it on time.