Payday loans in New Zealand are small short-term cash loans that are scheduled to be repaid over four to six weeks coinciding with the borrower’s payday. This type of loan is unsecured meaning no collateral is required from the borrower. Loan fees and interest rates vary among lenders.
How do I compare the cost of a payday loan from different lenders?
To compare the cost of a payday loan from different lenders, the amount of interest and fees on top of the money borrowed must be taken into account. Interest rates and fees vary among lenders so the only way to compare the cost of borrowing between lenders is to calculate the total amount to repay, known as the total amount payable. See the loan costs here
This total amount payable must be clearly stated before a payday contract is signed. Each part of the total amount payable must also be clearly stated, i.e. the amount of cash advanced + the fees + the total interest charge.
How is Interest charged on a payday loan?
The amount of interest that is charged on a payday loan is calculated by multiplying the unpaid loan balance by the daily interest rate. The daily interest rate is calculated by dividing the annual interest rate by 365 (days in a year). For example, an interest rate of 250% per year is the same as 0.6849% per day.
Because interest on a payday loan is calculated daily, the quicker the loan is paid back, the lower the total interest charge will be and therefore, the lower the total amount payable on the loan will be. This means that weekly repayments will cost the borrower less for the loan overall than fortnightly or monthly repayments. On the contrary, if a loan repayment is missed or dishonours and the repayment schedule is extended to allow for the missed payment, the total amount payable will be more than originally stated.
What about fees on a payday loan?
The Credit Contract and Consumer Finance Ammendment Act 2014 requires all payday lending fees to be reasonable. This means that lenders can only charge fees for costs likely to be incurred during the lifetime of the loan. There will be a fee for setting up the loan, often known as the establishment fee, as well as other fees which may be fixed or optional. An example of a fixed fee is a monthly administration fee. An example of an optional fee is a fast payment fee for the cash advance.
What happens if things go wrong and I miss a loan repayment or repayments?
If you have a payday loan and suddenly find you can’t afford a repayment you will need to contact your lender asap. By contacting your lender a new arrangement can be agreed so that default fees and charges can be minimised.
Penalty fees for missed payments apply on payday loans and can quickly mount up which will make your borrowing cost more than stated in your contract. Current legislation requires payday loan default fees to be reasonable and also requires lenders to be fair and reasonable with borrowers at all times, including if they are having difficulty with repayments.
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