Pros & Cons of payday loans explained by

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Tips to consider before taking out a payday loan by Paul Turvey of

What are Payday loans?

Payday Loans are short term loans that are repayed on the next payday. When used correctly, payday loans can be a good source of emergency cash. Payday loans are typically available between £80 and £1,200. As payday loans are only designed for short term borrowing, they are more expensive than unsecured or personal loans. Payday loans are easy to apply for with most loan providers offering online applications and very fast payouts. Some payday loans can be paid out in less than 10 mins. Payday loans are availiable for people with bad credit & CCJ's, payday loans and default payday loans being availiable from most lenders. Payday loans can be obtained with no faxing and/or credit checks.

A payday loan is a small, short-term loan provided by a payday lender that is intended to cover living expenses until the next payday. They generally range between £100 and £1,200 and if applied too close to the next payday, they will roll the loan over until the following payday.

The interest rates may seem extremely high, as they are displayed as an annual interest rate, but will generally pay back anything between £20 and £50 per every £100 borrowed. Payday loans can be a lot cheaper than unauthorised bank charges so they may be a better option than going overdrawn.

How do they work?:

A payday loan is a small, short term cash/credit loan solution that can provide people with finance to tide people over until next paid from employment.

Payday customers will need to do an application via their website or over the phone. They will credit check potential customers (some companies do "no credit check payday loans”) and check the validity of employment and bank details. If a potential client is accepted, the money is generally paid out within a couple of days of the application (although some lenders do instant or 24 hour loans). Payday users have the money for the length of the term, unless they wish to pay it back early to save interest charges with some lenders.

When it comes around to the next payday, the money is usually deducted from a debit card. If required, users may be able to roll the loan over to the following payday but remember that this can end up costing a lot more as interest charges still apply again and may be charged for rolling over the loan. It is advised not to roll over a loan unless potential payday customers have made good financial planning to compensate for the actions.

Why is the APR so high with payday lenders?:

Every lender must disclose their representative APR, in the UK this is a legal requirement, if they refuse or can't do this walk away and make a complaint to the office of fair trading (OFT). APR is really helpful when used to compare loans that are for a year or longer. APR is not the best way to compare payday loans because you are usually paying the loan back within 31 days or so.

The APR number becomes extremely high because it represents the interest that would be payable if payday users did actually have that payday loan, at that rate, for a year.

APR is not easy to understand and that's why before applying, people need to make sure they know exactly what they are going to pay back on payday. Most payday loans have a certain charge for every £100 borrowed but others still calculate the repayments using APR.

Advantages of using payday loans:

  • Payday loans are very usually flexible and easy to use online.
  • Payday loans used correctly can improve credit rating.
  • Quick fix solution before next wages are due.
  • Very quick transfer times, application and acceptance.
  • Avoids embarrassment of asking employers, friends or family for loans.
  • Can help with large unexpected bills if a forward financial plan is complied.

Disadvantages of using payday loans:

  • Payday loan interest charges are usually very high APR.
  • Using these loans incorrectly will lead users into deeper financial trouble.
  • Credit rating if currently poor will self destruct if payments are defaulted.
  • The high interest rates can diminish disposable income.
  • If defaulted, lenders could take out large amounts when users accounts are in credit.
  • Payday loan users could "act in haste and repent at leisure".

Additional fee's/charge a payday lender may/could impose:

  • Admin fee, this is a charge users may pay for acceptance of a loan.
  • Validity fee, this is usually applied to check card/bank details.
  • Transfer fee, this is generally optional or set out in the terms & conditions.
  • Roll over costs, fee's may apply to roll over a loan to next month.
  • Late payment/default fee's, a fee applied for default or late payments.
  • Early settlement fee, usually does not apply with most payday lenders.
  • Arrears fee, a fee for a loan going into arrears.
  • Collection fee, usually applied when a third party collection agency need to recoup the debt.
  • Solicitor, baliff and court costs fee's.

Things to consider before applying for a payday loan:

  • Make sure that the payday loan is for a good valid purpose.
  • Put pen to paper with bank statements and also have a good think what out-goings are for each average month.
  • Make a plan how to pay off each loan. If a payday user can't afford to pay off the loan without taking out another loan the following month period, then make a plan how to reduce the capital each month, do not take out more than four loans in succession, look for other sources like 12 month loans for bad credit or other options.
  • Never ever roll over a loan unless sufficient plans have been put in place to cover the actions.
  • Make sure to research and select the best plan to suit.
  • Most people don't read the terms & conditions, start to read them.
  • Make sure funds will be in the account for the promise date, as some employer's sometime pay late in the day, make the promise date for the following day, this will avoid late collection fee's.

This release is intended for tips to help people consider before taking out a payday loan.
The advice given should not be taken as legal financial advice.

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Paul Turvey

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