The big risks of small loans

25 May 2015

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If you need a quick loan to cover you until pay day or to fund an impulse buy, fast loans services like Nimble and Cash Train may appeal to you.

While they may be convenient and easily accessible, these services are not necessarily easy to pay off.

In Australia, fast loans services allow a user to borrow between $100 and $5,000 at the maximum interest rate allowed by the government.

Most of these services, also known as payday lenders, can charge the user with late fees and default payments, which rapidly add to an outstanding debt.

Nimble is one of the most prominent services in the Australian fast loans market. It has been slammed by critics for its “no catch” messages in its advertising.

According to Alice Uribe from The New Daily, experts believe Nimble’s television advertisement “lures a generation of borrowers into a cycle of debt from which it is difficult to escape”.

A study by Choice Magazine found that the worst offender in Australia was Cash Train, with comparison rates and fees on a $250 loan adding up to a wallet-withering 742 per cent per annum.

Nimble also charges the maximum comparison rate the law allows, at 20 per cent once the loan is established plus four per cent compounded monthly.

While the government can limit what you owe when it comes to interest, late fees are an entirely different matter.

Nimble currently adds $35 in late fees for missed payments, plus an additional $7 daily for overdue repayments.

According to Sam de Brito of the Sydney Morning Herald, this can lead to a total fee increase of 92 per cent annually if compounded monthly.

De Brito says that the maximum amount Nimble can charge is 200 per cent of the original amount borrowed. “It doesn’t sound like much, but to a broke Gen Y it’s crippling,” he said.

So what is it that attracts so many people, particularly of younger generations, to use these services?

Mark Maddern of Maddern Financial Advisers tells upstart that people are spreading their budgets too thin. “A lot of this comes from not planning ahead and assessing your needs,” he says.

“These companies do have their place in the market for those who need short-term cash accessibility with less hassle, but their lack of assessment leads to higher interest.”

If you don’t want to risk these rates and fees but are still worried about being left high and dry before your next pay, there are other options that may be less financially damaging.

Jeremy Vohwinkle of suggests first going to your employer and asking to receive your pay early. He warns that it’s not something that can be done regularly, however, and should be reserved for genuine emergencies.

“Employers want to keep good employees happy,” he said. “While this won’t always work, and you won’t be able to make it a habit, if you are facing a true emergency and bring it up with your employer, there’s a good chance you can get some sort of financial assistance.”

Budgeting can be a major problem for young people. Cutting out unnecessary or impulse purchases and scrounging a few dollars here and there can add up to cover you until your next pay day.

Maddern suggests setting up an emergency fund. This could contain three to six months’ worth of living expenses in case of emergency and is generated by taking a small percentage out of each pay.

“Saving a ‘nest egg’ or ‘emergency fund’ should be your first option,” he says. “The best way to avoid the need for loans is to know your current position and financial needs. That way, you are able to cut out unnecessary spending and more effectively manage your cash flow.”

Another option is peer-to-peer lending, which is predicted to have rapid growth in Australia. This service can offer lower rates and fees than a loan from a big bank.

If you need help managing your finances, there are free and confidential services available online.

The Victorian government’s Money Help service or the federal government’s Money Smart are examples of this, which can provide direct help or refer you on to other affordable services to get your finances straight.

There are even community-based forums where users can share tips and help each other out with budgeting, such as Reddit’s personal finance forum.

Another often overlooked avenue is going to a local pawn shop or Cash Converters. While this means giving up personal items in exchange for money, it can also mean significantly lower interest rates than lending services or credit cards, and will give you ample time to repay the business and get your items back.

It may seem easy to get a loan, but paying it back and avoiding additional fees is not always so straightforward. Exploring the alternatives and setting up an emergency fund are good ways to avoid hidden dangers.


Kieran BalmacedaKieran Balmaceda is a third-year Bachelor of Strategic Communication student at La Trobe University. You can follow him on Twitter: @KieranBlam.




Featured image by Helen Cobain via Flickr