Pay Advance Apps and Payday Loans: What Borrowing Before Payday Costs

It's Tuesday, payday is Friday week, and a bill for $200 is due before then. An app on your phone offers to send you $200 of your next pay right now. It looks like your own money arriving early, but repayments come out of future pays.

Pay advance apps and payday loans are the two quick ways to borrow before payday. They work differently and cost different amounts, but both are repaid from the pay you're waiting for. That means the real question is less about this week and more about what's left of the next pay once they've taken their share.

How a pay advance app works

A pay advance service gives you access to upcoming pay. Some lend against expected wages; earned wage access draws on wages you've already earned. Repayments, including fees, come from your account or future pays on agreed dates. Charges vary and can include flat fees, processing charges or interest.

A fee can look small beside the advance. Before you accept, the app's terms show the charges and repayment dates.

How a payday loan works

A payday loan, also called a small amount loan, lets you borrow up to $2,000 and repay it over 16 days to one year. Licensed lenders can't charge interest on these loans, but they can charge fees: up to 20% of the amount borrowed when the loan starts, and up to 4% of it every month.

Those two fees add up quickly. On Moneysmart's own example, a $2,000 payday loan repaid over a year costs about $3,360 in total, which is $1,360 more than was borrowed. The law also caps your repayments at 10% of your income after tax, so on a modest wage even a small payday loan is spread across several pays.

What $200 until payday costs each way

Meet Jordan, who's made up. Jordan works casual shifts, takes home about $1,000 a fortnight, and has a $200 power bill due four days before payday. Here are three ways to cover it, from cheapest to most expensive.

More time from the biller can avoid borrowing. Many billers, including energy retailers and phone companies, can give you more time or set up a payment plan if you ask before the bill is due, but ask whether the arrangement has any fees. Our guide to getting help with energy bills covers what to ask for, and asking for hardship help works the same way for other bills.

If you get a Centrelink payment, you may be able to take part of it early as an advance payment, with no interest or fees; check your eligibility in Services Australia’s advance-payment guidance. For an essential that has broken, such as a fridge or a laptop for study, a No Interest Loan is fee-free as well, though it pays the shop rather than giving you cash.

Why one advance can turn into the next

The $10 fee in Jordan's example isn't really the cost to watch. The bigger effect is on the next pay, which arrives $210 lighter. If that pay was already just enough, the gap moves forward a fortnight and the app is there again.

The next advance leaves another fee to cover. If that gap keeps returning, a free financial counsellor on 1800 007 007 can help you work through repayment options. If your shifts change from week to week, our guide to budgeting on casual income shows how to keep part of a busy pay for a quiet one.

Payday loans can create a similar cycle when a new loan covers repayments on an old one.

See the short week coming

An advance can happen when a bill falls before payday. When you can see that a few days early, asking the biller for more time is still an option. Our guide to working out what's left before payday shows how to find that number by hand.

Clova, our budgeting app, does the same from your connected accounts: it puts upcoming bills beside your next pay, so you can compare bill dates with payday. Each pay also gets its own plan, so you can see how much of the next one is already spoken for.

Once a full pay lands untouched, keeping a small amount aside from it starts an emergency fund, so the next short week has its own money. Even $20 a fortnight comes to $520 over a year, and it's a cushion that never charges a fee.

A note from us

We are building Clova to show bills beside the pay that needs to cover them.