Is payday lending ever a suitable last resort?

If I were single, paying rent, and no longer able to work because I am perceived as being too old or my health limits my opportunities, and I only have minimal cash in my bank account, I would find trying to survive on $996.40 per fortnight an extreme struggle.

What is this mysterious amount of $996.40 I have mentioned?

It is the full single age pension of $867.00, plus the maximum rent assistance $129.40, which I would be entitled to provided I am paying rent of at least $287.53 per fortnight. Understanding the calculation of a person’s rent assistance entitlement is a topic for another blog.

The average rent for a one bedroom flat varies greatly depending on where you are in Australia but I believe it is probably close to $350 per week, with a bedsitter costing around $250 per week. If I was paying $250 per week rent I would be left with $496.40 per fortnight from my Age Pension to cover food, utilities, health, transport and any unforeseen financial circumstances which may occur – heaven forbid.

Outside the usual wonderful charities, such as the Salvation Army, St Vinnies, Smith Family, etc. that do exist to help people like me in the circumstances I have described, what would my options be if I was faced with an unforeseen circumstance which required an urgent financial remedy?

I could be lulled into a false sense of security by some of the payday lenders’ advertisements which appear on a regular basis in the media espousing how quick and easy it is to borrow a small amount of money. Approval in most cases is provided within the hour, in some cases regardless of your credit or work history or the fact that you are in receipt of a government income support payment such as the Age Pension.

Excellent, I have solved my problem. Or have I?

The interest rate that is applicable to most of these payday lenders can vary between 24% and 36% depending on the time frame taken to repay the loan. To give you an idea, if I were to borrow $400 and repay it over 2 to 3 months, the total repayment would be close to $500, with interest accounting for the extra $100. For someone in my situation on $996.40 per fortnight, this is a lot and amounts to 24% in interest charges.

So what is my alternative?

I could talk to Centrelink – why Centrelink you may ask?

The Social Security Act, which is administered by Centrelink, allows for a person in receipt of an income support payment such as the Age Pension to apply for an advance of their payment if they are faced with financial difficulties.

As a single person the minimum amount I could apply for would be $409.15 and the maximum is $1,227.45. For a couple the minimum and maximum amounts are slightly different. The amounts are based on a very complicated formula which sees the minimums and maximums increase twice a year.

Other considerations taken into account when assessing a request for an advance payment include the number and amounts of requests made in the last six months. A person is limited to a maximum of three advances in any six month period, depending on the dollar amount of each advance.

Repayment of the advance or loan is over a maximum period of 13 fortnights. In the circumstances I have outlined, if I were to apply for the minimum $409.15, it would equate to $31.47 per fortnight deducted from each age pension payment over the next 13 fortnights.

Importantly, no interest is payable on an advance payment. It is certainly a far more attractive and less expensive option than some of the other short-term loan options.

So, if I need an advance payment, how do I apply?

An application can be made on-line, or in person be visiting your local Centrelink office.

If faced with financial difficulties or you need cash for unforeseen bills, remember that Centrelink may be a far more palatable option when compared to the gaggle of payday lenders which are in the market place.

I would like to thank Luke Whiteley from Tasmania for suggesting this topic for our blog. If you have topics you would like us to cover, please enter your suggestion in the Comments box.

The Realise Your Dream blogs are written by Peter Kelly and Mark Teale. More information about the authors can be found here