Unless you’re a total shut-in, I’m sure you’ve heard of payday loans by now. Payday lenders are everywhere; on the high street, in the banners of your browser and before your YouTube videos. If you’ve hit hard times, and your credit rating isn’t too great, then you might be interested in one of these services. There are a few things you should know beforehand though.
So, what is a payday loan? The clue’s in the name! Payday loans are loans, made to a lender or creditor, intended to see a person through to their next payday. Typically, they have a fixed fee, which represents the finance charge to the borrower. Due to their short terms, the cost of borrowing through a payday lender is usually very high compared to the alternatives. Before the loan is approved, the borrower will have to give some kind of insurance. This is usually in the form of debit authorisation, or a pre-dated cheque made out to the lender.
The process of payday loans is fairly straightforward. Let’s say you had some kind of repair which couldn’t wait, and wanted to borrow £300. After a chat with the payday lender, you’ll write them a pre-dated cheque for £340. This is just an example of the amount plus a finance fee. These vary from lender to lender. Then, the lender will advance you that £300 for a pre-determined period. With most lenders, this will be around 14 days. Then, when the period is up, they’ll deposit the pre-dated cheque for £340, or you can pay up using a different method. If you fail to pay on time, you’ll run headlong into the main downside of payday loans. An additional fee will be added to your bill, and these will continue to pile up the longer you take to pay.
So, is it for you? Payday loans can be a good option for people who don’t have access to credit cards or savings. Most payday lenders don’t require a credit check as part of the lending process. Consequently, it’s seen as a good way out for people having credit issues or who have no credit score at all. This has made it fairly popular for military employees, and recent immigrants. They’re an effective, quick fix for financial crises, when you don’t have any other recourse available. As you’ve probably heard though, there are downsides to payday loans. It’s essential that the borrower can pay back the loan within the given period. If you’re not able to meet the date you’re given, then additional fees can rack up alarmingly fast. If you get stuck in the cycle of payday loans, you could end up facing all kinds of larger financial problems. Once you’re in, it can be extremely hard to get out! The average annual percentage rate of a payday loan is about 400%. However, they’ve been known to get much higher!
If you know you can pay up on time, then payday loans may be a good option for you. However, you’ll probably have much more stable options available.