Small amount loans or payday loans are often subject to negative publicity; however, as with any loan, these can actually save you heartache and money if used wisely. Laws introduced in 2013 protect your rights in signing a contract for a small amount loan, usually under $2000. By understanding your rights, only applying for the loan in appropriate situations and reorganising your finances, a small amount loan does not have to lead into a payday borrowing merry-go-round.

Check Your Options

A reputable lender will not approve you as a client unless you are able to repay. Use the following guidelines to determine whether or not the loan you are being offered is a suitable product.

• You will be asked to demonstrate that you have a steady work income by showing recent bank statements.
• If a large percentage of your income comes from Centrelink, lenders may curtail the amount you can borrow so that repayments are not more than 20% of your income.
• The establishment fee, account keeping fees, government charges and default fees should be clearly explained and written in the contract. Based on the amount you wish to borrow, ask your lender to calculate exactly how much these costs will be. For Australian lenders, the establishment fee is 20% of the loan amount and the monthly account keeping fee is 4%.
• Under current laws, Australian lenders cannot charge interest on a straightforward payday loan; however, many online lenders operate from overseas. If your loan repayments include interest, check the contract carefully for terms and conditions as this may be a different type of agreement such as a business loan or a lease.

When to Get a Payday Loan

Australian banks and credit unions do not usually offer small loans, especially under $500. Furthermore, if you have damaged your credit rating, gaining a loan from a traditional institution is difficult. Here are some valid situations where failing to obtain a loan will actually cost you money.

Car repairs: If you depend on your car to commute and no public transport options are available, you will obviously lose income if you do not seek a small amount loan for the necessary repairs.

Short courses: If a simple qualification such as a first aid certificate, upgraded driver's license or workplace health and safety course will greatly enhance your chances of employment or a better job, this is a worthwhile choice. Check first to see that there are no government subsidies or programs available to assist.

Work equipment: If you are self-employed and a vital piece of equipment fails, you need to repair or replace it urgently in order to retain income. For example, your laptop may crash, leaving you unable to check business emails. In many jobs, you may be required to provide your own toolbox or safety clothing. An employer often reimburses these items, but the payment may not be immediate. A small amount loan will act as an investment in your future.

Bills: Staying in a motel or hostel because your electricity or water has been cut off will be exorbitantly expensive. In this case, a small amount loan is financially sensible. If possible, negotiate repayment options with your utility provider first.

When to Avoid a Payday Loan

If you are on a low income or have been rejected for a payday loan, check the emergency relief options available on the Australian government's Money Smart website. If you have become caught up in a payday debt cycle due to personal problems, Money Smart also provides a list of counselling services that can help. Here are some golden rules to help you avoid a spiral into debt:

• Seek treatment rather than small amount loans for addictions such as alcohol, drugs and gambling.
• Save up for new clothes, entertainment and holidays. A small amount loan should never be used for luxuries.
• Budget carefully so that you can afford the weekly grocery bill. Small amount loans should be for unforeseen situations, not basic necessities.
• Never use a small amount loan to pay off other debts such as a mortgage or credit card. Consult your financial institution for advice.
• There are many options for medical assistance in Australia. Never use small amount loans to meet medical costs. Consult Centrelink or Medicare for advice and assistance.

Be frugal and work hard to ensure that your small amount loan is paid back promptly. This will minimise charges and establish you as a reliable customer should you ever need to request such a loan again. By allowing you to retain employment or avoid unnecessary expenses, a small amount loan can pay dividends. Use this service wisely and your financial goals will soon be back on track. For more information, contact a company like Mobile Money Australia.