With so many people facing financial difficulties from the impact of COVID-19, a recent report by the ABC voiced concerns over small loan lenders actively targeting vulnerable people by offering short-term loans to get them through the coronavirus pandemic.
This overview of small loans takes a closer look at the fees and rates and includes questions to ask if you are considering this type of loan, so you can do your research and consider your options carefully.
What is a small loans?
A small loans - more formally known as a Small Amount Credit Contract (SACC) - is essentially a high-cost short-term loan. These loans are for amounts between AUD100-AUD2000 and need to be repaid within the period of 4 weeks to one year.
Since there's no credit check involved, you can usually be approved for a small loans quickly. But this easy-to-get money comes with a heavy price, usually in the form of exorbitant fees and up to triple-digit interest rates.
Why would I get a loan?
Imagine this: the hot water unit has just blown up and you have no cash to buy a new one. You need to fix it quickly so you sign up for a small loans. Sounds like a good solution, doesn't it?
However, in signing up for a small loans, you're committing yourself to repay your lender a total amount greater than the amount you are borrowing from them.
Here's an example: to borrow AUD500 to get the new hot water unit, it might cost you about AUD800 to repay your lender over a 12-month term. You might be certain you can repay the AUD800 over 12 months without problems but the big question is whether the small loans is worth it.
How is a small loans different from a credit card?
- Credit cards allow you to borrow money - your line of credit - from a lender in order to make purchases. Unless you pay off your monthly balance in full each month, interest will accrue on the amount of debt that you carry forward.
- There is no credit check for small loans - making it quick and easy to get access to funds
- According to a recent article on the ABC news website, short-term lenders in Australia are structuring their businesses to avoid regulation under national credit law - consumer protections like affordability checks, financial hardship assistance and proper dispute resolution processes.
- small loan lenders actively promote themselves to you once they have your details in their system - even when you've paid back the loan. This constant temptation sent to you via email and SMS can be hard to resist if you are facing a tight time financially - or just really want some new clothes or furniture.
- Both are still debt and can be a strike on your credit rating if you don't pay it back in time.
What to consider
If you're convinced that a small loans is for you then here are some things to know before you sign on the dotted line.
- How well do I understand the product?
- Do I understand the total amount I need to repay or just the amount I am seeking to borrow?
- How detailed and realistic is the plan I have for repaying the loan?
- Am I borrowing for responsible reasons?
- Is it essential to borrow now or could my timing be better?
- Have I considered alternatives to small loans?
- What impact would this debt have on my borrowing capacity for other loans, like a home loan?
How does the small loans process work?
To get approved for a small loans, you need to provide documentation including bank statements, ID, copies of bills or Centrelink receipts, employment information and income details.
Be sure to check the fees for the different providers. Some of the key ones include the establishment fee, monthly fee, late payment fee and default fee. The maximum establishment fee a lender can charge is 20% of the borrowed amount. If you borrow AUD500, for example, you may need to repay that plus an additional AUD100 (20% of the borrowed amount).
Factor in late payment fees, which are commonly set at AUD27 per missed payment, and you can see that it's easy to find yourself with a debt that is almost double what you borrowed. Default fees are significant too. A lender can charge you up to twice the total amount of the loan in default fees before they're capped, inclusive of any repayment fees you made under the contract.
You may wish to use a loan calculator before you apply for a small loans to work out all the incremental costs payable on the loan.
Do your research to protect yourself
The better informed you are about small loans, the better you can protect yourself from potential drawbacks and the more confident your decision making will be. If you make a decision to apply for a small loans, your due diligence should always involve performing a prior background check of potential lenders and ensuring that you satisfy eligibility requirements for the loan. Conducting your due diligence will go some way to helping you take care of your money and protect your credit report.
Still a debt
Although the amount borrowed may be small, a small loans still counts as a debt. When applying for other credit, for example, if you were applying for a home loan, this debt would be taken into account in your application. You might find it useful to visit MyCashOnline
COVID-19 and small loans
Many people are experiencing financial stress with the impacts of the global pandemic COVID-19. An easy or quick fix may be to borrow more money to pay off existing debts.
If you already in financial hardship getting another credit card or taking on a small loans could worsen the situation by taking out a high-cost, short-term loan.
If you are in need of quick cash for personal expenses, apply for a fast personal loan with My Cash Online today.