Why Are Payday Loans Bad For Your Loan Application?

This article explains how payday loans could hurt your credit history and your loan application.
Last modified: 29th April 2024
William Jolly  |  

It can be tempting during a cost-of-living crisis to turn to alternative finance methods to get by.

If you’re looking for a quick money fix, you might stumble across something called a payday loan. Though it may seem like an attractive option, there are some dangers surrounding this type of lending.

In this article, we’ll detail what payday loans are, how they work and how they can affect your chances of approval for a personal loan.

This article was initially published in September 2022.

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Did you know: Although technically ‘Payday Loans’ have been banned since 2013, the term is still prevalent within the industry as it is recognisable by consumers. In this article, we use payday loans and small loans interchangeably when referring to SACCs.


What is a payday loan?

A payday loan, also known as a short-term loan (STL) or small amount credit contract (SACC), is a small loan that typically allows you to borrow up to $2,000. Payday loan terms can range from 16 days to a year, which is typically shorter than the terms you’d get on a standard personal loan.

Payday loans are infamous for being costly ways to borrow money. MoneySmart.gov.au, the Australian Government’s initiative to help Aussies take control of their finances every day, strongly suggests against them.

Warning the public that payday loans aren’t the cheapest option, it said, “If you're struggling to pay your bills, don't get a payday loan”.

Who are the major payday lenders in Australia?

There are quite a few providers of short-term loans in Australia, some of which also provide larger loans as well. Some of the major players in this space as of 2024 include:

  • Cash Converters
  • Nimble
  • Perfect Payday 
  • Sunshine Loans
  • Swoosh Finance

Before resorting to payday loans, consider exploring other alternatives, such as negotiating with creditors, seeking assistance from financial counsellors, or accessing low-interest loans (or no-interest loans if you qualify) from reputable sources.

Payday loan fees

Payday Lenders legally cannot charge interest on the amount borrowed. However, this does not stop them from charging expensive fees.

A typical payday loan may look like this:

Fee typeMaximum charge
Establishment feeMaximum 20% of the amount borrowed
Monthly feeMaximum 4% per month of the amount borrowed
Default feeCharged for missed payments, varies between lenders.
Source: ASIC.

Australia’s current credit laws state that interest charges cannot be more than 48% per annum. However, payday lenders technically don’t charge interest;: they charge fees, so they are able to charge a lot more than this legally. According to CHOICE:

“When you unpick the calculation, the interest charges on these loans can come to over 400%.

What is the average payday loan debt?

According to NAB, the average payday loan debt as of December 2023 was $751. Gen Zs (18 - 29) had the highest average debt, at $997. Senior Australians over 65, on the other hand, owed just $250.

DemographicAverage payday loan debt
18-29$997
30-49$685
50-64$716
65+$250
Men$613
Women$1,029
Lower-income$413
Higher-income$678
Source: NAB Australian Wellbeing Survey Q4 2023.

On average, NAB also found that payday loan debts were the most stress-inducing of all debts and that one in 10 Australians facing financial hardship had accessed a payday loan at least once within a three-month period.


Payday loan example

Hamish owes money to his older sister, Jessica, for their dad’s medical bills. Jessica has been breathing down Hamish’s throat for quite some time. Hamish can’t exactly make ends meet as it is, so he decides to take out a payday loan for $2,000 over the term of 12 months. He pays Jessica, and though he is not in debt to his sister anymore, he has other problems coming.

His payday loan has an establishment fee of 20%, equal to $400. The monthly fees are 4% of the amount borrowed, which is $80 a month or $960. Hamish’s total amount to repay, including the original borrowed amount, is $3,360. This is $1,360 (or 68%) more than he originally borrowed!


How payday loans can affect your credit

Payday loans can have some harmful impacts on your credit score. If you apply for several small loans, your credit score could take a hit, which is visible to lenders when they assess your finances.

As payday loans often involve significant fees, there could be a greater chance of missing repayments. Not only could this potentially hurt your credit score, but it could also be easy to end up in a debt spiral that can have lasting consequences.

Damaging your credit score can be very easy with payday loans.

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How payday loans can affect your loan application

Payday loans could negatively impact your loan application when you apply with Jacaranda Finance or any reputable lender. 

Most lenders will assess your transaction and loan history when you apply for a loan and will look at how many STLs (short-term loans) and SACCs (small-amount credit contracts) you’re currently repaying or have applied for, plus a range of other factors.

This is because of something called the debt-to-income ratio (DTI), which lenders consider when assessing creditworthiness. The more times someone takes out a payday loan, the more debt they’re taking on relative to their income and the riskier they seem as borrowers. 

To responsible lenders, payday loans indicate an applicant's need for quick money fixes and lack of control over their finances. Even if you currently have a good credit score, your application could be hindered by the frequent use of short-term loans.

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Tips to get your loan application approved

Generally speaking, you can improve your chances of getting approved for a loan by doing the following:

  • Budget: Whether it means sitting down with a spreadsheet, downloading a budgeting app or simply talking to someone about your finances, budgeting could put you in a better financial position.
  • Pay off your loan on time: If you do have a payday loan, make sure you pay it off on time. If lenders can see that you’re a responsible borrower, you could have a higher chance of loan approval.
  • Avoid using payday loans to pay off debt: If you are using a payday loan to pay off another loan, consider other options, such as a debt consolidation loan or call the National Debt Hotline on 1800 007 007. 
  • Don’t apply for more than one payday loan: You may have a smaller chance of approval with two or more payday loans across multiple different lenders.

It’s generally recommended that you clean up your finances as much as possible in the months before a loan application.

Settle any existing debts you have or consolidate them into one loan; cut down on expenses like gambling, wage advances and buy now, pay later (BNPL) purchases; and demonstrate a good savings record by making regular contributions to a savings account.

Above all, make sure you apply for a realistic loan amount with a lender that suits your needs.


Resources for debt & financial assistance

If you’re struggling with money or debts, you can call the free National Debt Helpline on 1800 007 007 (Monday – Friday). Aboriginal and Torres Strait Islander peoples can also contact the free Mob Strong Debt Helpline on 1800 808 488.

ASIC MoneySmart also recommends doing the following:


Payday loans vs personal loans: which is better?

As with all forms of personal borrowing, the right option for you entirely depends on your needs and current situation.

While payday loans can sometimes offer immediate relief for short-term financial needs, they come with significant risks and may not be suitable for long-term stability. 

Though potentially slower in funding and more rigid in application, personal loans usually provide a safer borrowing option with better consumer protections and lower costs in the long run. 

It's advisable to use payday loans sparingly and consider personal loans for more significant expenses to maintain your financial health and improve creditworthiness over time.

Jacaranda Finance Personal Loans

A Jacaranda Finance personal loan could be a more responsible option than short-term payday loans. At Jacaranda, we offer loans from $3,000 to $25,000, with loan outcomes delivered on the same day2.

You can check if you qualify for a personal loan without affecting your credit score. If we reject your application, we won’t make a hard enquiry on your credit report, so your score will remain unchanged - no harm done!

To get started, apply through our 100% online application process in as little as 5-12 minutes1.

Written by - William Jolly

Content Manager
William is the Content Manager at Jacaranda Finance. He has worked as both a journalist and a media advisor at some of Australia's biggest financial comparison sites such as Canstar, Compare the Market and Savings.com.au, and is passionate about helping Australians find the right money solution for them.

You can get in touch with William via williamj@jacarandafinance.com.au.
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