What is a payday loan?

Payday lenders operate as direct lenders or as brokers, and the process is built for speed: apply online or by phone, hand over identification, proof of income and bank account details, and consent to a debit. Approval leans on your recent income and bank transactions rather than a long credit history, and lenders commonly advertise same-day funding.

Repayment is either a single lump sum on a nominated payday or a set of instalments, taken automatically from your account. Terms run from 16 days to a year, most commonly set around the next pay cycle. The contract should set out the interest or service fee, the establishment fee, any late fees and the full repayment schedule, so read it before you sign the direct debit authority.

Payday loans are priced in fees rather than one rate, which makes them awkward to compare against an instalment loan. Expect an establishment or application fee, a service fee for the credit itself, account-keeping charges, and penalties if a payment is late or a debit is dishonoured. Where the loan is a small amount credit contract, it cannot be refinanced by another one, so borrowing again means a fresh loan and a fresh set of fees rather than an extension of the old one.

Add the components together to get the total repayable, then hold that against the amount borrowed and the number of days you have it. On that basis, short-term fees work out to a very high effective cost. Ask for the total repayable in writing, and for a comparison rate where one applies, before you agree to anything.

Payday lending sits under consumer credit law. Lenders must hold a credit licence, meet responsible lending obligations and disclose costs clearly, and ASIC's registers let you check a licence before you apply. Treat these as warning signs: approval promised regardless of income, a fee demanded upfront to release funds, pressure to sign a debit authority unread, or a lender you cannot verify.

If you cannot repay, contact the lender straight away and ask for its hardship policy in writing. Missed payments bring late and dishonour fees, and a default can be listed on your credit file. Free financial counsellors and the National Debt Helpline can help you build a plan. Complaints go through the lender's internal process first, then to AFCA.