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Payday Loan and Wage Advance: What You Need to Consider

Wage advances and payday loans are regarded as short-term forms of credit with repayment schedules aligned with your pay cycle. In contrast to traditional payday loans like Small Amount Credit Contracts, wage advances have emerged as an alternative in recent years due to the high fees associated with payday loans. Although both allow customers early access to their salary, it’s important to understand their differences and things to consider when searching for one of these products.

What is a payday loan and wage advance?

In Australia, payday loans often refer to Small Amount Credit Contracts (SACC’s), and we will use these terms interchangeably. These types of loans allow you to borrow up to $2,000 from a payday loan provider, with repayment terms ranging from 16 days to 1 year. These payday loans do not charge interest, but providers can impose fees of up to 20% of the borrowed amount as an establishment fee, along with a 4% fee every month.

A wage advance, also known as pay-on-demand or pay advance, typically involves service providers charging a flat fee of up to 5% for each advance, and some companies may also charge an annual interest rate of up to 24%. Credit limits vary among providers, with most offering a maximum wage advance of $2,000 and Wagepay having the highest limit in the industry at $2,500. Repayment for wage advances is expected on your next payday.

Let’s take a closer look at how these two options differ.

High Fees of Payday Loans

Payday loans may provide a convenient source of cash, but they come with substantial fees. For example, borrowing $2,000 for one month can incur a $400 establishment fee (20% of the total loan) and an $80 monthly fee (4% of the loan), totalling $480 in fees. In contrast, a wage advance for the same amount would typically involve a $100 flat fee (5% of the total advance) and, if applicable, a $39.83 interest charge*, resulting in a maximum of $139.83 fees.

In cases of late payments, payday loan companies can charge high default fees. The amount you can repay on one of these loans can be up to 200% of the original loan amount. So if you borrow $100 and incur default fees, you can be charged up to $100 in fees, and repay a total of $200. Also, you can be charged enforcement costs on top of this if you fail to repay. Conversely, most wage advance providers do not charge default or late payment fees, and all you need to repay will be the 5% flat fee and interest fees if applicable on top of the amount you borrowed.

Let’s look at a comparison when borrowing $2,000 for one month.

Payday LoanWage Advance
Cost$400 establishment fee
$80 monthly fee
$100 flat fee
$39.45 interest fee if applicable*
Default feeVariesGenerally no default fees or late fees
Total payable if no missed payments$2,480$2,139.83
Maximum payable If payments missed$4,000$2,139.83
Further feesEnforcement charges if you fail to repayN/A
*Example based on a repayment period of 30 days and an interest rate of 24% p.a.

Payday loan has a longer repayment period

In addition to varying fees, payday loans often offer longer repayment periods ranging from 16 days to 1 year. You can repay in instalments with a frequency that aligns with your pay cycle. However, longer repayment periods can lead to higher accumulated costs, such as the 4% monthly fee. This accumulation can create stress and potentially lead to a debt trap. When borrowing $2,000 and repaying over 12 months, you will need to repay a total of $3,360, which includes a $400 establishment fee and a total of $960 in monthly fees. This is $1,360 more than what you borrowed and doesn’t include any additional default fees. 

However, having a longer repayment period also means a lower weekly, fortnightly or monthly payment, which might be less stressful for some. Wage advance services typically require full repayment on your next payday, with some providers offering split payment options to enhance repayment flexibility, allowing payments to be spread over 2-4 instalments. Therefore, unlike payday loans which you can repay in multiple instalments for up to 1 year, the repayment period for wage advances is much shorter. This shorter repayment period can help avoid additional fees and encourage responsible financial management.

Credit Limits and Checks

Payday loans, regulated as Small Amount Credit Contracts (SACC loans), are legally capped at a maximum credit limit of $2,000. In contrast, there is no cap for wage advance providers regarding the credit limit. Most providers have a maximum of $2,000 and Wagepay provides the highest credit limit of $2,500. 

Both payday loan and wage advance providers are not required to conduct credit checks, although some SACC loan providers do so. Instead of credit checks, SACC loan lenders are required by law to obtain and review 90 days of bank statements for each loan application, while wage advance providers usually base their assessments on bank statements or payroll data.

Choosing Between the Two

When deciding between payday loans and wage advances, consider the differences in cost, repayment schedules, credit limits, and application assessments. Wage advances typically offer the same, or even higher cash limit at a lower cost than payday loans, making them ideal for covering urgent expenses with minimal cost. However, the longer repayment period of payday loans may appeal to customers who struggle to pay a large amount of money all at once and prefer lower instalment payments.

It’s essential to evaluate your financial situation and the urgency of your needs before making a decision. Calculate the total cost of both options and assess your ability to repay within the specified timeframe.

Wagepay’s Wage Advance

At Wagepay, we provide Australians with early access to their wages with our wage advance product. We charge a flat fee of up to 5% and 24% interest per annum, with no late fees. No credit check is required; instead, we assess based on your bank account history and calculate a bank score to determine your advance limit. We offer eligible customers a credit limit of up to $2,500. We require customers to repay on their next payday, however to enhance repayment flexibility, we allow each customer to either postpone their repayment once or split their advance into 2 instalments. 

Download our app or sign up via the website portal and apply for up to $2,500 today!

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