Payday loans are designed to be short term – to offer you a small amount of cash to tide you over until payday. The size of the loan is usually between £50 and £1,000 and is designed to be paid back with 30 days or 60 days. They are useful in helping you cover unexpected one-off bills but they are an expensive way to borrow money. If you are thinking of taking one out please read this user guide first.
Why Are They Popular?
Getting a pay-day loan is generally quick and easy and this is why they are so popular. Even people with poor credit history’s can successfully apply. In addition, the loan is usually paid straight into your bank account, often within minutes of you applying for the loan. The speed of the process has led to a legally required “14 day cooling off period” which allows customers who change their mind to back out of the agreement providing they repay the loan plus interest.
Repaying The Loan
Most Payday Loans offer customers 30 days to repay the amount borrowed plus interest. Some companies will allow you to choose a different repayment period but beware, the longer you take to repay the loan, the more interest you will be charged.
On the repayment date the Payday Loan company will take the money they’re owed directly from your bank account. Beware of whats called “continuous payment authority” which allows the lender to make repeated attempts to take money from your account if there is not enough to cover the amount owed on the first attempt. This is when things can start to get out of control as you may be faced with penalty charges from your bank as well as late payment fee’s from the Payday Loan company.
How Much Do They Cost?
Payday lenders usually charge a fee instead of an interest rate, usually £25 interest for every £100 borrowed, if you pay it back within 28 days. If you convert this to an APR in order to compare the cost of borrowing via your credit card – The Payday Loan company is charging an APR of over 1,700% compared to an average credit card APR of around 20%.
Put it another way, borrowing £100 via a pay day loan will cost you £25 for 1 month. Borrowing the same amount on a credit card would cost you £20 for 1 year.
If you don’t pay the loan back on time, the late payment fee’s (£12-£25) and interest quickly start to mount up which makes it more and more difficult for the borrower to get out of debt. More than 50% of people who have taken out Payday Loans were encouraged by the lender to take out additional loans if they are unable to repay the first one.
Some lenders will offer customers extensions to their loan (also known as deferrals or rollovers). More than 50% of people who have taken out Payday Loans were encouraged by the lender to take out additional loans if they are unable to repay the first one.
When Should You Use A Payday Loan?
In an ideal world we would never need to use this sort loan but the world is rarely fair and sometimes people have no choice but to seek out one of these short term loans. Unexpected bills from a broken down car or utility are common reasons, as is paying off another type of loan (loan sharks etc). Sometimes however a household just needs to money to buy food and pay their energy bills until pay day arrives.
There are a few rules to follow;
- Never ever use a Payday Loan to pay off a credit card, bank loan or another Payday loan. The charges from banks and credit cards will be lower than the Payday loan
- Never take out a payday loan if you know you will not be able to repay it in 30 days
- Never use a Payday Loan for unnecessary spending like nights out, sports tickets, new clothes, gifts or holidays
- Make sure your lender will cap charges and interest if you are unable to repay the loan
- Like all financial products, shop around as interest rates vary widely
PayDay loans should only ever be used for short term borrowing to cover emergency situations. They are a potential “debt trap” that should be avoided whenever possible.
Alternatives to Payday Loans
Payday loans are convenient but the high interest rates should make them an option of last resort. Before applying considered alternative solutions like;
- Borrowing from friends or family
- Selling something online or at a car boot sale
- Borrowing on your credit card
- Asking Your Bank For A Loan Or Overdraft
- Borrowing From A Credit Union
- Emergency financial aid from your local government
New Payday Loan Regulations
Recently, the government has implemented strict new rules to cover Payday Loans. Lenders are no longer able to charge a customer more than 100% of the amount borrowed in interest, fee’s and late payment charges. There are also rules on how many times a lender can access a borrowers bank account.